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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 2001
REGISTRATION NO. 333-43192
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PDF SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7379 25-1701361
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
333 WEST SAN CARLOS STREET, SUITE 700
SAN JOSE, CA 95110
(408) 280-7900
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JOHN K. KIBARIAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
333 WEST SAN CARLOS STREET
SUITE 700
SAN JOSE, CA 95110
(408) 280-7900
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
PETER COHN MARK A. BERTELSEN
LOWELL D. NESS JOSE F. MACIAS
M. ELISE ALEXANDER BURKE F. NORTON
ORRICK, HERRINGTON & SUTCLIFFE LLP ELISE M. BRINCK
1020 MARSH ROAD WILSON SONSINI GOODRICH & ROSATI
MENLO PARK, CA 94025 PROFESSIONAL CORPORATION
(650) 614-7400 650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 9, 2001
4,500,000 Shares
[PDF Solutions, Inc. Logo]
Common Stock
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Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $11.00 and $13.00 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "PDFS."
The underwriters have an option to purchase a maximum of 675,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS PDF SOLUTIONS
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Per Share............................................ $ $ $
Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about ,
2001.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
The date of this prospectus is , 2001.
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[INSIDE FRONT COVER]
[COLOR ARTWORK]
[The artwork depicts a bridge between IC design and manufacturing.]
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 16
USE OF PROCEEDS....................... 17
DIVIDEND POLICY....................... 17
CAPITALIZATION........................ 18
DILUTION.............................. 19
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 22
BUSINESS.............................. 32
PAGE
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MANAGEMENT............................ 42
RELATED-PARTY TRANSACTIONS............ 52
PRINCIPAL STOCKHOLDERS................ 55
DESCRIPTION OF CAPITAL STOCK.......... 58
SHARES ELIGIBLE FOR FUTURE SALE....... 61
UNDERWRITING.......................... 63
NOTICE TO CANADIAN RESIDENTS.......... 66
LEGAL MATTERS......................... 67
EXPERTS............................... 67
WHERE TO FIND ADDITIONAL
INFORMATION......................... 67
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and our Consolidated Financial Statements and Notes thereto
appearing elsewhere in this prospectus. Unless otherwise stated, information in
this prospectus assumes (i) no exercise of the underwriters' over-allotment
option, (ii) the two-for-three reverse stock split of our common and preferred
stock, which was completed on July 6, 2001, and (iii) the conversion of all
outstanding shares of preferred stock into 6,333,318 shares of common stock upon
completion of the offering.
PDF SOLUTIONS, INC.
Our comprehensive technologies and services enable semiconductor companies
to improve yield and performance of manufactured integrated circuits by
providing infrastructure to integrate the design and manufacturing processes. We
believe that our solutions can significantly improve a semiconductor company's
time to market, the rate at which yield improves and product profitability. To
date, we have sold our technologies and services to, and established ongoing
relationships with, key integrated device manufacturers such as Toshiba
Corporation, Sony Corporation, Conexant Systems, Inc., Philips Semiconductor and
Texas Instruments Incorporated.
Customers for electronic products continue to demand new applications with
more power, reduced cost and smaller size. This leads semiconductor companies to
adopt diverse new technologies for integrated circuits, or ICs. At the same
time, they face dramatically compressed product life cycles. This has reduced
the time for semiconductor companies to successfully bring a product to market
in high volumes to achieve dominant market share and high-margin revenues. In
the current environment, semiconductor companies have encountered significant
challenges in their attempt to achieve competitive yields and optimize
performance, which are critical drivers of IC companies' financial results.
Disaggregation of the semiconductor industry into several separate specialized
organizations and entities has further complicated IC companies' ability to
maximize yield and optimize performance by fragmenting design and manufacturing
process knowledge. The combination of these factors has left a gap between the
design of an IC and its manufacture. We call this gap the design-to-silicon
yield gap.
We provide comprehensive silicon-infrastructure technologies and services
to address and bridge the design-to-silicon yield gap. Our offerings combine
proprietary manufacturing process simulation, IC yield and performance modeling
software, comprehensive test chips, proven yield and performance enhancement
methodologies, and professional services. Our technologies and services drive
design and manufacturing changes that enable our customers to improve IC yield
and performance earlier in product life cycles, thereby enabling our customers
to simultaneously generate additional revenue and reduce costs. The result of
implementing our solutions is the creation of value that can be measured based
on improvements to our customers' actual IC yield and performance. We seek to
align our financial interests with our customers' business results. Through an
innovative approach that we call gain share, in addition to a fixed fee we
receive revenue that increases based on increased value we create for our
customers. To date, we have determined this value based on the demonstrated
yield and performance improvements our customers realize on specific products or
processes. As a result, our recurring revenues scale to the extent our customers
continue to realize these improvements.
Our objective is to provide the industry standard in design-to-silicon
yield solutions. To achieve this objective, we intend to leverage our
results-based gain share model to deepen our relationships with our customers
and rapidly generate market-driven improvements to our solutions. In addition,
we intend to focus our solutions on key high-volume, high-growth IC product
segments. We will also seek to extend and enhance our relationships with leading
companies at key stages of the design-to-silicon process, thereby increasing our
insight into future industry needs, and increasing industry awareness of our
solutions. We intend to continue expanding our research and development efforts,
and to selectively acquire complementary businesses and technologies to increase
the scope of our solutions. Further, we plan to expand geographically to gain
access to international engineering talent and to maintain proximity to our
expanding customer base.
We have a limited operating history. As of March 31, 2001, our accumulated
deficit was $12.6 million. For the years ended December 31, 1998, 1999, 2000 and
the three months ended March 31,
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2001, our net losses were approximately $404,000, $145,000, $9.1 million and
$2.7 million respectively. We expect our spending to continue to exceed our
revenue as we expand our business.
We were incorporated in Pennsylvania in November 1992. We reincorporated in
California in November 1995 and reincorporated in Delaware in July 2001. Our
principal executive office is located at 333 West San Carlos Street, Suite 700,
San Jose, CA 95110. Our telephone number at that location is (408) 280-7900. Our
Internet address on the world wide web is http://www.pdf.com. Information on our
web site does not constitute part of this prospectus.
RECENT DEVELOPMENTS
For the quarter ended June 30, 2001, we had revenue of $8.3 million,
compared to revenues of $4.6 million for the quarter ended June 30, 2000.
Revenue from design-to-silicon yield solutions represented 73% and gain share
represented 27% of total revenue for the quarter ended June 30, 2001. Our net
loss for the quarter ended June 30, 2001, was $2.2 million, or $0.25 per share
on a basic and diluted basis (on approximately 8.5 million weighted average
shares), compared to a net loss for the quarter ended June 30, 2000 of $1.3
million or $0.19 per share on a basic and diluted basis (on approximately 7.1
million weighted average shares). For the quarters ended June 30, 2001 and 2000
our net loss included stock-based compensation amortization of $2.1 million and
$1.2 million, respectively.
THE OFFERING
Common stock offered................ 4,500,000 shares
Common stock offered in the
concurrent private placement........ 500,000 shares (or such lesser amount
of shares having a maximum aggregate
purchase price of $10.0 million)
Common stock to be outstanding after
this offering and the concurrent
private placement................. 22,206,611 shares
Use of proceeds..................... For general corporate purposes,
including working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.............................. PDFS
This table is based on shares outstanding as of March 31, 2001. The number
of shares to be outstanding after this offering and the concurrent private
placement is based on:
- a two-for-three reverse stock split of our common and preferred stock
that was effective July 6, 2001;
- 10,873,293 shares of our common stock outstanding on March 31, 2001;
- automatic conversion of our Series A preferred stock outstanding on March
31, 2001 into 5,833,331 shares of our common stock upon completion of
this offering; and
- automatic conversion of our Series B preferred stock outstanding on March
31, 2001 into 499,987 shares of common stock upon the closing of this
offering, which includes an additional 149,115 shares of our common stock
to be issued upon conversion of our Series B preferred stock, assuming the
initial public offering price is less than $14.25 per share.
The number of shares to be outstanding after this offering and the
concurrent private placement excludes:
- 369,689 shares issuable upon exercise of stock options and stock purchase
rights outstanding on March 31, 2001 at a weighted average exercise price
of $4.45 per share;
- 1,395,117 shares reserved under our 1997 stock plan as of March 31, 2001
and available for grant prior to completion of this offering of which we
currently intend to grant options to purchase at least 650,000 shares to
new and existing employees prior to completion of this offering; and
- 3,300,000 shares reserved under our 2001 stock plans and available for
grant following completion of this offering.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1998 1999 2000 2000 2001
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CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Total revenue............................. $6,227 $11,824 $20,135 $ 3,694 $ 7,534
Total costs and expenses.................. 6,417 11,541 29,216 4,102 10,224
Income (loss) from operations............. (190) 283 (9,081) (408) (2,690)
Net loss.................................. (404) (145) (9,097) (498) (2,743)
Net loss per share -- basic and diluted... $(0.08) $ (0.02) $ (1.24) $ (0.07) $ (0.34)
Shares used in computing basic and diluted
net loss per share...................... 4,944 6,086 7,356 6,797 8,065
Pro forma net loss per share -- basic and
diluted................................. $ (0.68) $ (0.19)
Shares used in computing pro forma basic
and diluted net loss per share.......... 13,394 14,398
MARCH 31, 2001
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 6,866 $ 6,866 $61,916
Working capital.......................................... 3,377 3,377 58,427
Total assets............................................. 15,034 15,034 70,084
Long-term debt, less current portion..................... 43 43 43
Convertible preferred stock.............................. 8,457 -- --
Total shareholders' equity (deficiency).................. (2,214) 6,243 61,293
See Notes 1 and 8 of Notes to Consolidated Financial Statements for an
explanation of the determination of the amounts used in computing net loss per
share and pro forma net loss per share amounts.
The pro forma balance sheet data above reflects the conversion of all
shares of our preferred stock into 6,333,318 shares of common stock
automatically upon completion of this offering.
The pro forma as adjusted balance sheet data gives effect to the sale of
shares of common stock in this offering and 500,000 shares of common stock (or
such lesser amount of shares having a maximum aggregate purchase price of $10.0
million) to be sold in the concurrent private placement at an assumed initial
public offering price of $12.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses, and the
application of the net proceeds.
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock in
this offering.
RISKS RELATING TO OUR BUSINESS
IF SEMICONDUCTOR DESIGNERS AND MANUFACTURERS DO NOT ADOPT OUR DESIGN-TO-SILICON
YIELD SOLUTIONS, WE MAY BE UNABLE TO INCREASE OR MAINTAIN OUR REVENUE.
If semiconductor designers and manufacturers do not adopt our
design-to-silicon yield solutions, our revenue could decline. To date, we have
worked with a limited number of semiconductor companies on a limited number of
integrated circuit, or IC, products and processes. To be successful, we will
need to enter into agreements covering a larger number of IC products and
processes with existing customers and new customers. Our existing customers are
large integrated device manufacturers, or IDMs. We will need to target as new
customers additional IDMs, as well as semiconductor companies in different
segments of the semiconductor market, such as fabless semiconductor companies,
foundries and system manufacturers. Factors that may limit adoption of our
design-to-silicon yield solutions by semiconductor companies include:
- our customers' failure to achieve satisfactory yield improvements using
our design-to-silicon yield solutions;
- a decrease in demand for semiconductors generally or the demand for deep
submicron semiconductors failing to grow as rapidly as expected;
- the industry may develop alternative methods to enhance the integration
between the semiconductor design and manufacturing processes due to a
rapidly evolving market and the likely emergence of new technologies;
- our existing and potential customers' reluctance to understand and accept
our innovative gain share fee component, which is a variable fee based on
improvements in our customers' yields; and
- our customers' concern about our ability to keep highly competitive
information confidential.
OUR EARNINGS PER SHARE AND OTHER KEY OPERATING RESULTS MAY BE UNUSUALLY HIGH IN
A GIVEN QUARTER, THEREBY RAISING INVESTORS' EXPECTATIONS, AND THEN UNUSUALLY LOW
IN THE NEXT QUARTER, THEREBY DISAPPOINTING INVESTORS, WHICH COULD CAUSE OUR
STOCK PRICE TO DROP.
Historically, our quarterly operating results have fluctuated. Our future
quarterly operating results will likely fluctuate from time to time and may not
meet the expectations of securities analysts and investors in some future
period. The price of our common stock could decline due to such fluctuations.
The following factors may cause significant fluctuations in our future quarterly
operating results:
- the size and timing of sales volumes achieved by our customers' products;
- the loss of any of our large customers;
- the size of improvements in our customers' yield and the timing of
agreement as to those improvements;
- our long and variable sales cycle;
- changes in the mix of our revenue;
- changes in the level of our operating expenses needed to support our
projected growth; and
- delays in completing solution implementations for our customers.
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OUR RECENT ADOPTION OF A NOVEL AND UNPROVEN BUSINESS MODEL MAKES IT DIFFICULT TO
EVALUATE OUR FUTURE PROSPECTS.
Since we recently adopted our current business model, we do not have a long
history of operating results on which you can base your evaluation of our
business. In 1998, we began selling software, services and other technologies
together as a design-to-silicon yield solution for the first time. Because we
have not demonstrated our ability to generate significant revenue, our business
model is unproven, especially with respect to gain share fees, which we expect
will constitute a significant portion of our revenue for the foreseeable future.
In the past, we generally earned fixed fees for the separate sale of our
software, services and other technologies. Under our new business model, we are
selling these items together as a package and charging both a fixed fee and a
variable fee based on demonstrated improvements in our customers' yields, which
we call gain share. Our existing and potential customers may resist this
approach and may seek to limit or restrict our gain share fees. As a result, it
will be difficult for financial markets analysts and investors to evaluate our
future prospects.
OUR GAIN SHARE REVENUE IS LARGELY DEPENDENT ON THE VOLUME OF ICS OUR CUSTOMERS
ARE ABLE TO SELL TO THEIR CUSTOMERS, WHICH IS OUTSIDE OUR CONTROL.
Our gain share revenue for a particular product is largely determined by
the volume of that product our customer is able to sell to its customers, which
is outside of our control. We have limited ability to predict the success or
failure of our customers' IC products. We may commit a significant amount of
time and resources to a customer who is ultimately unable to sell as many units
as we had anticipated when contracting with them. Since we currently work on a
small number of large projects, any product that does not achieve commercial
viability could significantly reduce our revenue and results of operations below
expectations. In addition, if we work with two directly competitive products,
volume in one may offset volume, and any of our related gain share, in the other
product.
GAIN SHARE MEASUREMENT REQUIRES DATA COLLECTION AND IS SUBJECT TO CUSTOMER
AGREEMENT, WHICH CAN RESULT IN UNCERTAINTY AND CAUSE QUARTERLY RESULTS TO
FLUCTUATE.
We can only recognize gain share revenue once we have reached agreement
with our customers on their level of yield performance improvements. Because
measuring the amount of yield improvement is inherently complicated and
dependent on our customers' internal information systems, there may be
uncertainty as to some components of measurement. This could result in our
recognition of less revenue than expected. In addition, any delay in measuring
gain share could cause all of the associated revenue to be delayed until the
next quarter. Since we currently have only a few large customers and we are
relying on gain share as a significant component of our total revenue, any delay
could significantly harm our quarterly results.
CHANGES IN THE STRUCTURE OF OUR CUSTOMER CONTRACTS, PARTICULARLY THE MIX BETWEEN
FIXED AND VARIABLE REVENUE, CAN ADVERSELY AFFECT THE SIZE AND TIMING OF OUR
TOTAL REVENUE.
Our success is largely dependent upon our ability to structure our future
customer contracts to include a larger gain share component relative to the
fixed fee component. If we are successful in increasing the gain share component
of our customer contracts, we will experience an adverse impact on our operating
results in the short term as we reduce the fixed fee component, which we
typically recognize earlier than gain share fees. In addition, by increasing the
gain share component, we increase the variability of our revenue, and therefore
increase the risk that our total future revenue will be lower than expected and
fluctuate significantly from period to period.
WE GENERATE VIRTUALLY ALL OF OUR TOTAL REVENUE FROM A LIMITED NUMBER OF
CUSTOMERS, SO THE LOSS OF ANY ONE OF THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE
OUR REVENUE AND RESULTS OF OPERATIONS BELOW EXPECTATIONS.
Historically, we have had a small number of large customers and we expect
this to continue in the near term. In the three months ended March 31, 2001,
four customers accounted for 83% of our total net
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revenue, with Toshiba representing 31%, Matsushita Electric Industrial Co., Ltd.
representing 20%, Conexant representing 17% and Sony representing 15%. The loss
of any one customer could significantly reduce our total revenue below
expectations. In particular, such a loss could cause significant fluctuations in
results of operations due to our expenses being fixed in the short term, the
fact that it takes us a long time to replace customers and because any
offsetting gain share revenue from new customers would not begin to be
recognized until much later.
IT TYPICALLY TAKES US A LONG TIME TO SELL OUR NOVEL SOLUTIONS TO NEW CUSTOMERS,
WHICH CAN RESULT IN UNCERTAINTY AND DELAYS IN GENERATING ADDITIONAL REVENUE.
Because our gain share business model is novel and our design-to-silicon
yield solutions are unfamiliar, our sales cycle is lengthy and requires a
significant amount of our senior management's time and effort. Furthermore, we
need to target those individuals within a customer's organization who have
overall responsibility for the profitability of an IC. These individuals tend to
be senior management or executive officers. We may face difficulty identifying
and establishing contact with such individuals. We typically send one or more of
our senior executives and several engineers to meet with a prospective customer.
Even after initial acceptance, due to the complexity of structuring the gain
share component, the negotiation and documentation processes can be lengthy. It
can take six months or more to reach a signed contract with a customer.
Unexpected delays in our sales cycle could cause our revenue to fall short of
expectations.
WE HAVE A HISTORY OF LOSSES, WE EXPECT TO INCUR LOSSES IN THE FUTURE AND WE MAY
BE UNABLE TO ACHIEVE OR SUBSEQUENTLY MAINTAIN PROFITABILITY.
We may not achieve or subsequently maintain profitability if our revenue
increases more slowly than we expect or not at all. In addition, virtually all
of our operating expenses are fixed in the short term, so any shortfall in
anticipated revenue in a given period could significantly reduce our operating
results below expectations. Our accumulated deficit was $12.6 million as of
March 31, 2001. We expect to continue to incur significant expenses in
connection with:
- increased funding for research and development;
- expansion of our solution implementation teams;
- expansion of our sales and marketing efforts; and
- additional non-cash charges relating to amortization of intangibles and
deferred stock compensation.
As a result, we will need to significantly increase revenue to achieve
profitability. If we do achieve profitability, we may be unable to sustain or
increase profitability on a quarterly or annual basis. Any of these factors
could cause our stock price to decline.
WE MUST CONTINUALLY ATTRACT AND RETAIN HIGHLY TALENTED EXECUTIVES, ENGINEERS AND
RESEARCH AND DEVELOPMENT PERSONNEL OR WE WILL BE UNABLE TO EXPAND OUR BUSINESS
AS PLANNED.
We will need to continue to hire highly talented executives, engineers and
research and development personnel to support our planned growth. We have
experienced, and we expect to continue to experience, delays and limitations in
hiring and retaining highly skilled individuals with appropriate qualifications.
We intend to continue to hire foreign nationals, particularly as we expand our
operations internationally. We have had, and expect to continue to have,
difficulty in obtaining visas permitting entry into the United States, for
several of our key personnel, which disrupts our ability to strategically locate
our personnel. In addition, we have a number of openings for key executive
positions, including a Vice President of Marketing and additional Vice
Presidents of Client Services, that we will need to fill in order to
successfully execute our business strategy. We may have difficulty recruiting
these executives or integrating them into our existing management team. If we
lose the services of any of our key executives or a significant number of our
engineers, it could disrupt our ability to implement our business strategy.
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Competition for executives and qualified engineers is intense, especially in
Silicon Valley where we are principally based.
IF OUR DESIGN-TO-SILICON YIELD SOLUTIONS FAIL TO KEEP PACE WITH THE RAPID
TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY, WE COULD LOSE CUSTOMERS AND
REVENUE.
We must continually devote significant engineering resources to enable us
to keep up with the rapidly evolving technologies and equipment used in the
semiconductor design and manufacturing processes. These innovations are
inherently complex and require long development cycles. Not only do we need the
technical expertise to implement the changes necessary to keep our technologies
current, we also rely heavily on the judgment of our advisors and management to
anticipate future market trends. Our customers expect us to stay ahead of the
technology curve and expect that our design-to-silicon yield solutions will
support any new design or manufacturing processes or materials as soon as they
are deployed. If we are not able to timely predict industry changes, or if we
are unable to modify our design-to-silicon yield solutions on a timely basis,
our existing solutions will be rendered obsolete and we may lose customers. If
we do not keep pace with technology, our existing and potential customers may
choose to develop their own solutions internally as an alternative to ours, and
we could lose market share to competitors, which could adversely affect our
operating results.
WE INTEND TO PURSUE ADDITIONAL STRATEGIC RELATIONSHIPS, WHICH ARE NECESSARY TO
MAXIMIZE OUR GROWTH AND WHICH COULD SUBSTANTIALLY DIVERT MANAGEMENT ATTENTION
AND RESOURCES.
In order to establish strategic relationships with industry leaders at each
stage of the IC design and manufacturing processes, we may need to expend
significant resources and will need to commit a significant amount of
management's time and attention, with no guarantee of success. If we are unable
to enter into strategic relationships with these companies, we will not be as
effective at modeling existing technologies or at keeping ahead of the curve as
new technologies are introduced. In the past, the absence of an established
working relationship with key companies in the industry has meant that we have
had to exclude the effect of their component parts from our modeling analysis,
which reduces the overall effectiveness of our analysis and limits our ability
to improve yield. We may be unable to establish key industry strategic
relationships if any of the following occur:
- potential industry partners become concerned about our ability to protect
their intellectual property;
- potential industry partners develop their own solutions to address the
need for yield improvement;
- our potential competitors establish relationships with industry partners
with which we seek to establish a relationship; or
- potential industry partners attempt to restrict our ability to enter into
relationships with their competitors.
WE FACE OPERATIONAL AND FINANCIAL RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.
We derive a majority of our revenue from international sales, principally
from customers based in Japan. Revenue generated from customers in Japan
accounted for 82% of total revenue in the year ended December 31, 1998, 90% of
total revenue in the year ended December 31, 1999, 66% of total revenue in the
year ended December 31, 2000 and 66% of total revenue in the three months ended
March 31, 2001. We expect that a significant portion of our total future revenue
will continue to be derived from companies based in Japan. We are subject to
risks inherent in doing business in international markets. These risks include:
- some of our key engineers and other personnel who are foreign nationals
may have difficulty gaining access to the United States and other
countries in which our customers or our offices may be located;
- greater difficulty in collecting account receivables resulting in longer
collection periods;
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- language and other cultural differences may inhibit our sales and
marketing efforts and create internal communication problems among our
U.S. and foreign research and development teams;
- compliance with, and unexpected changes in, a wide variety of foreign
laws and regulatory environments with which we are not familiar;
- currency risk due to the fact that expenses for our international offices
are denominated in the local currency, while virtually all of our revenue
is denominated in U.S. dollars; and
- economic or political instability.
In Japan, in particular, we face the following additional risks:
- Any recurrence of the recent overall downturn in Asian economies could
limit our ability to retain existing customers and attract new ones in
Asia.
- If the U.S. dollar increases in value relative to the Japanese Yen, the
cost of our solutions will be more expensive to existing and potential
Japanese customers and therefore less competitive.
If any of these risks materialize, we may be unable to continue to market our
design-to-silicon yield solutions successfully in international markets.
COMPETITION IN THE MARKET FOR SOLUTIONS THAT ADDRESS YIELD IMPROVEMENT AND
INTEGRATION BETWEEN IC DESIGN AND MANUFACTURING MAY INTENSIFY IN THE FUTURE,
WHICH COULD SLOW OUR ABILITY TO GROW OR EXECUTE OUR STRATEGY.
Competition in our market may intensify in the future, which could slow our
ability to grow or execute our strategy. Our current and potential customers may
choose to develop their own solutions internally, particularly if we are slow in
deploying our solutions. Many of these companies have the financial and
technical capability to develop their own solutions. Currently, we are not aware
of any other provider of comprehensive commercial solutions for Systematic IC
yield and performance enhancement. We face indirect competition from the
internal groups at IC companies that work on process integration, including
groups at current customers, such as Toshiba or Conexant, and at prospective
customers. Some vendors to IC companies may also compete with us indirectly. For
example, Cadence Design Systems, Inc., a prominent electronic design automation
vendor, has offerings that help enhance IC layout in ways that could result in
improved yield. Providers of yield management software aimed at maintaining and
improving yield in mass production, such as KLA-Tencor Corporation, although
they can help us maintain yield gains achieved in integration and ramp, may
increasingly seek to broaden their offering and compete with us. In addition, we
believe that the demand for solutions that address the need for better
integration between the silicon design and manufacturing processes may encourage
direct competitors to enter into our market. For example, large integrated
organizations, such as IDMs, electronic design automation software providers, IC
design service companies or semiconductor equipment vendors, may decide to
spin-off a business unit that competes with us. Other potential competitors
include fabrication facilities that may decide to offer solutions competitive
with ours as part of their value proposition to their customers. If these
potential competitors are able to attract industry partners or customers faster
than we can, we may not be able to grow and execute our strategy as quickly or
at all. In addition, customer preferences may shift away from our
design-to-silicon yield solutions as a result of the increase in competition.
WE MUST EFFECTIVELY MANAGE AND SUPPORT OUR RECENT AND PLANNED GROWTH IN ORDER
FOR OUR BUSINESS STRATEGY TO SUCCEED.
We will need to continue to grow in all areas of operation and successfully
integrate and support our existing and new employees into our operations, or we
may be unable to implement our business strategy in the time frame we
anticipate, if at all. We expect to outgrow our principal office facilities by
May 2003 and at that time will need to secure additional space or relocate to a
larger facility, which could be difficult in the very competitive Silicon Valley
office leasing market. We will also need to switch to a new accounting system in
the near future, which could result in reporting errors and other difficulties
that may
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disrupt our business operations and distract management. In addition, we will
need to expand our intranet to support new data centers to enhance our research
and development efforts. Our intranet is expensive to expand and must be highly
secure due to the sensitive nature of our customers' information that we
transmit. Building and managing the support necessary for our growth places
significant demands on our management and resources. These demands may divert
these resources 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 customers. If we fail to do this, it could lead to
dissatisfaction among our customers, which could slow our growth.
OUR SOLUTION IMPLEMENTATIONS MAY TAKE LONGER THAN WE ANTICIPATE WHICH COULD
CAUSE US TO LOSE CUSTOMERS AND MAY RESULT IN ADJUSTMENTS TO OUR OPERATING
RESULTS.
Our solution implementations require a team of engineers to collaborate
with our customers to address complex yield loss issues by using our software
and other technologies. We must estimate the amount of time needed to complete
an existing solution implementation in order to estimate when the engineers will
be able to commence a new solution implementation. Given the time pressures
involved in bringing IC products to market, targeted customers may proceed
without us if we are not able to commence their solution implementation on time.
Due to our lengthy sales cycle, we may be unable to replace these targeted
implementations in a timely manner, which could cause fluctuations in our
operating results.
In addition, our accounting for solution implementation contracts, which
generate fixed fees, sometimes require adjustments to profit and loss based on
revised estimates during the performance of the contract. These adjustments may
have a material effect on our results of operations in the period in which they
are made. The estimates giving rise to these risks, which are inherent in
fixed-price contracts, include the forecasting of costs and schedules, and
contract revenues related to contract performance.
OUR CHIEF EXECUTIVE OFFICER AND OUR VICE PRESIDENT OF PRODUCTS AND METHODS ARE
CRITICAL TO OUR BUSINESS AND WE CANNOT GUARANTEE THAT THEY WILL REMAIN WITH US
INDEFINITELY.
Our future success will depend to a significant extent on the continued
services of John Kibarian, our President and Chief Executive Officer, and David
Joseph, our Vice President, Products and Methods. If we lose the services of
either of these key executives, it could slow execution of our business plan,
hinder our product development processes and impair our sales efforts. Searching
for their replacements could divert our other senior management's time and
increase our operating expenses. In addition, our industry partners and
customers could become concerned about our future operations, which could injure
our reputation. We do not have long-term employment agreements with these
executives and we do not maintain any key person life insurance policies on
their lives.
INADVERTENT DISCLOSURE OF OUR CUSTOMERS' CONFIDENTIAL INFORMATION COULD RESULT
IN COSTLY LITIGATION AND CAUSE US TO LOSE EXISTING AND POTENTIAL CUSTOMERS.
Our customers consider their product yield information and other
confidential information, which we must gather in the course of our engagement
with the customer, to be extremely competitively sensitive. If we inadvertently
disclosed or were required to disclose this information, we would likely lose
existing and potential customers, and could be subject to costly litigation. In
addition, to avoid potential disclosure of confidential information to
competitors, some of our customers may, in the future, ask us not to work with
key competitive products.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, CUSTOMERS OR POTENTIAL
COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGIES TO DEVELOP THEIR OWN SOLUTIONS
WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUE OR INCREASE OUR
COSTS.
Our success depends largely on the proprietary nature of our technologies.
We currently rely primarily on copyright, trademark and trade secret protection.
Whether or not patents are granted to us, litigation
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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. In the future, we intend to
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 even if issued, they may not be sufficiently broad to
protect our proprietary technologies. Also, patent protection in foreign
countries may be limited or unavailable where we need such protection.
OUR TECHNOLOGIES COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
CAUSING COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
Significant litigation regarding intellectual property rights exists in the
semiconductor industry. It is possible that a third party may claim that our
technologies infringe their intellectual property rights or misappropriate their
trade secrets. Any claim, even if without merit, could be time consuming to
defend, result in costly litigation or require us to enter into royalty or
licensing agreements, which may not be available to us on acceptable terms, or
at all. For example, in May 2001, we were named as a defendant in a lawsuit
claiming, among other things, that we misappropriated trade secrets. We are
defending ourselves against the claims, which we believe to be without merit. We
do not believe that this litigation, or resolution of this litigation, will have
a material negative impact on our business. In general, however, a successful
claim of infringement against us in connection with the use of our technologies
could adversely affect our business.
DEFECTS IN OUR PROPRIETARY TECHNOLOGIES AND SOFTWARE TOOLS COULD DECREASE OUR
REVENUE AND OUR COMPETITIVE MARKET SHARE.
If the software or proprietary technologies we provide to a customer
contain defects that increase our customer's cost of goods sold and time to
market, these defects could significantly decrease the market acceptance of our
design-to-silicon yield solutions. Any actual or perceived defects with our
software or proprietary technologies 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 software or proprietary technologies or enhancements to existing software or
proprietary technologies. Our software or proprietary technologies may contain
errors not discovered until after customer implementation of the silicon design
and manufacturing process recommended by us. If our software or proprietary
technologies 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.
WE MAY NOT BE ABLE TO RAISE NECESSARY FUNDS TO SUPPORT OUR GROWTH OR EXECUTE OUR
STRATEGY.
We currently anticipate that our available cash resources, combined with
the net proceeds from this offering, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, we may need to raise additional funds in order to:
- support more rapid expansion;
- develop or enhance design-to-silicon yield solutions;
- respond to competitive pressures; or
- acquire complementary businesses or technologies.
These factors will impact our future capital requirements and the adequacy of
our available funds. We may need to raise additional funds through public or
private financings, strategic relationships or other arrangements. We cannot
guarantee that we will be able to raise any necessary funds on terms favorable
to us, or at all.
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GENERAL ECONOMIC CONDITIONS MAY REDUCE OUR REVENUES AND HARM OUR BUSINESS.
As our business has grown, we have become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions. Because
of the recent economic slowdown in the United States, many industries are
delaying or reducing technology purchases. The impact of this slowdown on us is
difficult to predict, but it may result in reductions in purchases of our
technologies and services by our customers, longer sales cycles and increased
price competition. As a result, if the current economic slowdown continues or
worsens, we may fall short of our revenue expectations for any given quarter in
fiscal 2001 or for the entire year. These conditions would negatively affect our
business and results of operations.
WE RELY ON CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND THE CURRENT
ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout the state, with or without advance
notice. If blackouts interrupt our power supply, we may be temporarily unable to
operate. Any such interruption in our ability to continue operations could delay
the development of our products. Future interruptions could damage our
reputation, harm our ability to promote the use of our solutions and could
result in lost revenue, any of which could substantially harm our business and
results of operations. In addition, we do not carry sufficient business
interruption insurance to compensate us for losses that may occur, and any
losses or damages incurred by us could have a material adverse effect on our
business.
Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government and shortages in wholesale electricity supplies have
caused power prices to increase dramatically, and these prices will likely
continue to increase for the foreseeable future. If wholesale prices continue to
increase, our operating expenses will likely increase, as our headquarters and
most of our employees are based in California.
WE MAY NOT BE ABLE TO EXPAND OUR PROPRIETARY TECHNOLOGIES IF WE DO NOT
CONSUMMATE POTENTIAL ACQUISITIONS OR INVESTMENTS OR SUCCESSFULLY INTEGRATE THEM
WITH OUR BUSINESS.
To expand our proprietary technologies, we may acquire or make investments
in 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. We may have difficulty integrating the acquired products, personnel or
technologies of our recently acquired German company or of any additional
acquisitions we might make. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
RISKS RELATING TO OUR INDUSTRY
THE SEMICONDUCTOR INDUSTRY IS CYCLICAL IN NATURE.
Our revenue is highly dependent upon the overall condition of the
semiconductor industry, especially in light of our gain share revenue component.
The semiconductor industry is highly cyclical and subject to rapid technological
change and has been subject to significant economic downturns at various times,
characterized by diminished product demand, accelerated erosion of average
selling prices and production overcapacity. One such downturn appears to have
commenced during the third quarter of calendar 2000 and is continuing currently.
The semiconductor industry also periodically experiences increased demand and
production capacity constraints. As a result, we may experience significant
fluctuations in operating results due to general semiconductor industry
conditions, and overall economic conditions.
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SEMICONDUCTOR COMPANIES ARE SUBJECT TO RISK OF NATURAL DISASTERS.
Semiconductor companies have in the past experienced major reductions in
foundry capacity due to earthquakes in Taiwan, Japan and California. In light of
our gain share revenue component, our results of operations can be significantly
decreased if one of our customers must shut down IC production due to a natural
disaster such as earthquake, fire, tornado or flood. Moreover, since
semiconductor product life cycles have become relatively short, a significant
delay in the production of a product could result in lost revenue, not merely
delayed revenue.
RISKS RELATING TO THIS OFFERING
MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS FROM THIS
OFFERING AND, AS A RESULT, WE MAY NOT USE THE PROCEEDS TO THE SATISFACTION OF
OUR STOCKHOLDERS.
Our board of directors and management will have broad discretion in
allocating the net proceeds of this offering. They may choose to allocate such
proceeds in ways that do not yield a favorable return or are not supported by
our stockholders. We have designated only limited specific uses for the net
proceeds from this offering. Please see "Use of Proceeds."
THE CONCENTRATION OF OUR CAPITAL STOCK OWNERSHIP WITH INSIDERS UPON THE
COMPLETION OF THIS OFFERING WILL LIKELY LIMIT YOUR ABILITY TO INFLUENCE
CORPORATE MATTERS.
The concentration of ownership of our outstanding capital stock with our
directors and executive officers after this offering may limit your ability to
influence corporate matters. Upon completion of this offering, our directors and
executive officers, and their affiliates, will beneficially own 46.1% of our
outstanding capital stock. As a result, these stockholders, if acting together,
will have the ability to control all matters submitted to our stockholders for
approval, including the election and removal of directors and the approval of
any corporate transactions.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY.
Provisions of our certificate of incorporation and bylaws in effect after
completion of this offering and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. Please see "Description of Capital Stock."
NEGOTIATIONS BETWEEN THE UNDERWRITERS AND US DETERMINED THE INITIAL PUBLIC
OFFERING PRICE, BUT THE MARKET PRICE MAY BE LESS OR MAY BE VOLATILE, AND YOU MAY
NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
The initial public offering price for the shares has been determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. An active
public market for our common stock may not develop or be sustained after this
offering. The market price of our common stock may fluctuate significantly in
response to factors, some of which are beyond our control, including:
- actual or anticipated fluctuations in our operating results;
- changes in market valuations of other technology companies;
- conditions or trends in the semiconductor industry;
- announcements by us or our potential competitors of significant technical
innovations, contracts, acquisitions or partnerships;
- additions or departures of key personnel;
- any deviations in revenue or in losses from levels expected by securities
analysts;
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- volume fluctuations, which are particularly common among highly volatile
securities of technology related companies; and
- sales of substantial amounts of our common stock or other securities in
the open market.
General political or economic conditions, such as a recession, or interest
rate or currency rate fluctuations could also cause the market price of our
common stock to decline. Please see "Underwriting."
OUR STOCK PRICE IS LIKELY TO BE EXTREMELY VOLATILE AS THE MARKET FOR TECHNOLOGY
COMPANIES' STOCK HAS RECENTLY EXPERIENCED EXTREME PRICE AND VOLUME FLUCTUATIONS.
Volatility in the market price of our common stock could result in
securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of management's attention and resources.
Despite the strong pattern of operating losses of technology companies, the
market demand, valuation and trading prices of these companies have been high.
At the same time, the share prices of these companies' stocks have been highly
volatile and have recorded lows well below their historical highs. As a result,
investors in these companies often buy the stock at very high prices only to see
the price drop substantially a short time later, resulting in an extreme drop in
value in the stock holdings of these investors. Our stock may not trade at the
same levels as other technology stocks. In addition, technology stocks in
general may not sustain current market prices.
A LARGE NUMBER OF SHARES BECOMING ELIGIBLE FOR SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE.
Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. Our current stockholders hold a
substantial number of shares, which they will be able to sell in the public
market in the near future. Beginning on the effective date of this prospectus,
only the shares sold in the offering will be immediately available for sale in
the public market. Beginning 180 days after the effective date, approximately
15,715,207 shares will be eligible for sale pursuant to Rule 701 and pursuant to
Rule 144. An additional 1,991,404 shares will be eligible for sale on various
dates following the 181st day after the effective date of this prospectus,
subject to compliance with the provisions of Rule 144 or Rule 701 or pursuant to
a registration statement on Form S-8, which we expect to file following
completion of the offering. Outstanding options and rights to purchase an
additional 369,689 shares and at least an additional 650,000 shares we
anticipate granting to new and existing employees prior to completion of this
offering will be exercisable and eligible for sale on various dates following
the 181st day after the effective date of this offering. Please see "Shares
Eligible for Future Sale."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF THE STOCK
YOU PURCHASE.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
This is referred to as dilution. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $9.31, at an
assumed initial public offering price of $12.00 per share, in the tangible book
value per share of our common stock from the price you pay for our common stock.
Please see "Dilution."
IF WE RAISE ADDITIONAL CAPITAL THROUGH THE ISSUANCE OF NEW SECURITIES AT A PRICE
LOWER THAN THE INITIAL PUBLIC OFFERING PRICE, YOU WILL INCUR ADDITIONAL
DILUTION.
If we raise additional capital through the issuance of new securities at a
lower price than the initial public offering price, you will be subject to
additional dilution. If we are unable to access the public markets in the
future, or if our performance or prospects decrease, we may need to consummate a
private placement or public offering of our capital stock at a lower price than
the initial public offering price. In addition, any new securities may have
rights, preferences or privileges senior to those securities held by you.
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EXERCISE OF REGISTRATION RIGHTS AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE.
If holders of registration rights exercise those rights after this offering
and the concurrent private placement, a large number of securities could be
registered and sold in the public market, which could result in a decline in the
price of our common stock. If we were to include in a company-initiated
registration shares held by these holders pursuant to the exercise of their
registration rights, our ability to raise needed capital could suffer. After
this offering, the holders of 12,416,644 shares of our common stock, which will
represent a total of approximately 55.9% of our outstanding stock after
completion of this offering, are entitled to rights with respect to registration
under the Securities Act of 1933.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology; for instance, may, will,
should, intend, expect, plan, anticipate, believe, estimate, predict, potential
or continue, the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in "Risk Factors." These factors may cause
our actual results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, we are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform these statements to actual results, unless required by law.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 4,500,000
shares of our common stock pursuant to this offering and the sale of the 500,000
shares of our common stock in the concurrent private placement will be $55.1
million, or $62.6 million if the underwriters' over-allotment option is
exercised in full, at an assumed initial public offering price of $12.00 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
We currently intend to use the net proceeds from the offering, in
approximate percentage terms, as follows:
- 20-35% for further development of our products, technologies and
methodologies;
- 15-30% to increase Design-to-Silicon Yield Solutions capacity;
- 10-25% for the expansion of our marketing and sales organizations; and
- 10-55% for working capital and general corporate purposes.
These operating expenses will be partially offset by the degree to which we
continue to garner revenues from our ongoing activities.
The amounts and timing of these expenditures will vary significantly
depending upon a number of factors, including future revenue growth, if any,
competitive and technological developments and the amount of cash we generate
from operations. We may also use a portion of the net proceeds of this offering
to acquire additional businesses, products and technologies, to acquire
additional office space, or to establish joint ventures that we believe will
complement our current or future business. As a result, we will retain broad
discretion in the allocation of the net proceeds of this offering. Pending the
uses described above, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment grade securities. We cannot predict
whether the proceeds will be invested to yield a favorable return. We believe
our available cash, together with the net proceeds of this offering, will be
sufficient to meet our capital needs for at least the next 12 months.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash dividends
in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2001, on
the following three bases:
- on an actual basis after giving effect to the two-for-three reverse stock
split of our common stock and preferred stock;
- on a pro forma basis to reflect the conversion of all shares of our
preferred stock into 6,333,318 shares of common stock automatically upon
completion of this offering including the effects of dividends to be
recorded of $1,619,000 (based on an assumed initial public offering price
of $12.00 per share) representing the fair value of additional shares to
be issued to the Series B preferred stockholders in excess of the shares
issuable pursuant to the original terms of the Series B preferred stock;
and
- on a pro forma as adjusted basis to reflect the sale of shares of common
stock in this offering and 500,000 shares of common stock to be sold in
the concurrent private placement assuming an initial public offering
price of $12.00 per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses, and the
application of the net proceeds.
This table excludes:
- an aggregate of 369,689 shares subject to outstanding options and
purchase rights as of March 31, 2001 at a weighted average exercise price
of $4.45 per share;
- 1,395,117 shares reserved under our 1997 stock plan as of March 31, 2001
and available for grant prior to completion of this offering, of which we
currently intend to grant options to purchase at least 650,000 shares to
new and existing employees prior to completion of this offering; and
- 3,300,000 shares reserved under our 2001 stock plans and available for
grant following completion of this offering.
You should read this information together with our Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus. See
"Management -- Benefit Plans," "Related-Party Transactions" and Notes 7 and 12
of Notes to Consolidated Financial Statements.
MARCH 31, 2001
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Current portion of long-term debt........................... $ 1,023 $ 1,023 $ 1,023
======== ======== ========
Long-term debt, less current portion........................ $ 43 $ 43 $ 43
Series A convertible preferred stock, $0.00015 par value;
shares authorized: 5,833,333 actual and pro forma and none
pro forma as adjusted; issued and outstanding: 5,833,331
actual and none pro forma and pro forma as adjusted....... 3,497 -- --
Series B convertible preferred stock, $0.00015 par value;
366,667 shares authorized; issued and outstanding: 350,872
actual and none pro forma and pro forma as adjusted....... 4,960 -- --
Shareholders' equity (deficit):
Preferred stock, $0.00015 par value; shares authorized:
none actual and pro forma and 5,000,000 pro forma as
adjusted; issued and outstanding: none actual, pro forma
and pro forma as adjusted............................... -- -- --
Common stock, $0.00015 par value; shares authorized:
33,333,333 actual and pro forma and 75,000,000 pro forma
as adjusted; shares issued and outstanding: 10,873,293
actual, 17,206,611 pro forma and 22,206,611 pro forma as
adjusted................................................ 2 3 3
Additional paid-in capital................................ 25,088 35,163 90,213
Deferred stock-based compensation......................... (9,087) (9,087) (9,087)
Notes receivable from shareholders........................ (5,578) (5,578) (5,578)
Accumulated deficit....................................... (12,622) (14,241) (14,241)
Cumulative other comprehensive income..................... (17) (17) (17)
-------- -------- --------
Total shareholders' equity (deficiency)................. (2,214) 6,243 61,293
-------- -------- --------
Total capitalization.................................... $ 6,286 $ 6,286 $ 61,336
======== ======== ========
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DILUTION
Our pro forma net tangible book value as of March 31, 2001 was
approximately $4.7 million or $0.27 per share of common stock. Pro forma net
tangible book value per share of common stock represents the amount of pro forma
total assets, reduced by the amount of total liabilities and intangible assets,
divided by the total number of shares of common stock outstanding assuming
conversion of our preferred stock into 6,333,318 shares of common stock. After
giving effect to the adjustments set forth above, and the sale of shares of
common stock in this offering and 500,000 shares of common stock in the
concurrent private placement at an assumed initial public offering price of
$12.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma net tangible book
value as of March 31, 2001 would have been $59.7 million or $2.69 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $2.42 per share to existing stockholders and an immediate dilution
of $9.31 per share to new investors. The following table illustrates this per
share dilution:
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share before this
offering............................................... $0.27
Increase per share attributable to new public investors... 2.42
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Pro forma net tangible book value per share after this
offering.................................................. 2.69
------
Dilution per share to new public investors.................. $ 9.31
======
The following table summarizes on a pro forma basis as of March 31, 2001,
the differences between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid. The pro forma
basis gives effect to the automatic conversion of all preferred stock into
6,333,318 shares of common stock upon completion of this offering.
SHARES PURCHASED TOTAL CASH CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------- ------- -------------
Existing stockholders.............. 17,206,611 77.5% $14,518,344 19.5% $ .84
New investors (including private
placement investor).............. 5,000,000 22.5 60,000,000 80.5 $12.00
---------- ----- ----------- -----
Totals........................... 22,206,611 100.0% $74,518,344 100.0%
========== ===== =========== =====
As of March 31, 2001, options and rights to purchase 369,689 shares were
outstanding with a weighted average exercise price of $4.45 per share. As of
March 31, 2001, 1,395,117 shares were reserved under our 1997 stock plan and
available for grant prior to completion of this offering. Of the shares
reserved, we currently intend to grant options to purchase at least 650,000
shares to new and existing employees prior to completion of this offering. Upon
completion of this offering, we will have 3,300,000 shares reserved under our
2001 stock plans and available for grant upon completion of this offering. The
issuance of common stock under these plans will result in further dilution to
new investors. See "Management -- Benefit Plans," "Related-Party Transactions"
and Notes 7 and 12 of Notes to Consolidated Financial Statements.
19
22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes thereto and the other information
contained in this prospectus.
The selected consolidated balance sheets data as of December 31, 1999 and
2000 and the selected consolidated statements of operations data for each year
in the three years ended December 31, 2000, have been derived from our audited
Consolidated Financial Statements appearing elsewhere in this prospectus. The
balance sheet data as of March 31, 2001 and for the three months ended March 31,
2000 and 2001 have been derived from our unaudited Consolidated Financial
Statements appearing elsewhere in this prospectus. The selected consolidated
balance sheet data as of December 31, 1998 and the selected consolidated
statement of operations data for the year ended December 31, 1997 have been
derived from our audited consolidated financial statements not included in this
prospectus. The selected consolidated balance sheets data as of December 31,
1996 and 1997, and the selected consolidated statements of operations data for
the year ended December 31, 1996 have been derived from our unaudited
consolidated financial statements not included in this prospectus. The unaudited
consolidated financial statements have been prepared by us on a basis consistent
with the audited consolidated financial statements appearing elsewhere in this
prospectus and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of this data. Historical results are not necessarily indicative of
future results.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------ ------ ------ ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Design-to-silicon yield solutions......... $ 916 $2,621 $6,227 $10,567 $15,538 $ 2,194 $ 5,753
Gain share................................ -- -- -- 1,257 4,597 1,500 1,781
------ ------ ------ ------- ------- ------- -------
Total revenue........................... 916 2,621 6,227 11,824 20,135 3,694 7,534
------ ------ ------ ------- ------- ------- -------
Costs and expenses:
Cost of design-to-silicon yield
solutions............................... 163 596 1,533 4,091 6,915 1,252 2,556
Research and development.................. 624 1,005 1,864 3,087 6,418 946 2,657
Selling, general and administrative....... 454 1,404 2,959 4,295 7,333 1,446 2,454
Offering costs............................ -- -- -- -- 1,258 -- --
Stock-based compensation amortization*.... -- 14 61 68 7,292 458 2,557
------ ------ ------ ------- ------- ------- -------
Total costs and expenses................ 1,241 3,019 6,417 11,541 29,216 4,102 10,224
------ ------ ------ ------- ------- ------- -------
Income (loss) from operations............... (325) (398) (190) 283 (9,081) (408) (2,690)
Interest income and other................... 175 139 128 105 347 17 132
------ ------ ------ ------- ------- ------- -------
Income (loss) before taxes.................. (150) (259) (62) 388 (8,734) (391) (2,558)
Tax provision............................... -- 9 342 533 363 107 185
------ ------ ------ ------- ------- ------- -------
Net loss.................................... $ (150) $ (268) $ (404) $ (145) $(9,097) $ (498) $(2,743)
====== ====== ====== ======= ======= ======= =======
Net loss per share -- basic and diluted..... $(0.04) $(0.07) $(0.08) $ (0.02) $ (1.24) $ (0.07) $ (0.34)
====== ====== ====== ======= ======= ======= =======
Shares used in computing basic and diluted
net loss per share........................ 3,372 4,101 4,944 6,086 7,356 6,797 8,065
====== ====== ====== ======= ======= ======= =======
Pro forma net loss per share -- basic and
diluted................................... $ (0.68) $ (.19)
======= =======
Shares used in computing pro forma basic and
diluted net loss per share................ 13,394 14,398
======= =======
- ------------------
*STOCK-BASED COMPENSATION AMORTIZATION:
Cost of design-to-silicon yield
solutions............................ $ -- $ 4 $ 18 $ 20 $ 1,715 $ 42 $ 719
Research and development................ -- 10 43 48 4,016 355 1,181
Selling, general and administrative..... -- -- -- -- 1,561 61 657
------ ------ ------ ------- ------- ------- -------
$ -- $ 14 $ 61 $ 68 $ 7,292 $ 458 $ 2,557
====== ====== ====== ======= ======= ======= =======
20
23
DECEMBER 31,
------------------------------------------- MARCH 31,
1996 1997 1998 1999 2000 2001
------ ------ ------ ------ ------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................... $3,357 $2,208 $2,155 $1,933 $ 7,625 $ 6,866
Working capital............................. 3,277 2,854 2,501 2,153 3,707 3,377
Total assets................................ 3,797 5,351 4,837 5,644 15,514 15,034
Long-term debt, less current portion........ -- -- -- 72 56 43
Convertible preferred stock................. 3,497 3,497 3,497 3,497 8,457 8,457
Total shareholders' equity (deficiency)..... 100 (155) (480) (512) (2,026) (2,214)
21
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our comprehensive technologies and services enable semiconductor companies
to improve yield and performance of integrated circuits by providing
infrastructure to integrate the design and manufacturing processes. Our
design-to-silicon yield solutions combine proprietary manufacturing process
simulation, yield and performance modeling software, comprehensive test chips,
proven yield and performance enhancement methodologies, and professional
services.
From our incorporation in 1992 through late 1995, we were primarily focused
on research and development of our proprietary manufacturing process simulation
and yield and performance modeling software. From late 1995 through late 1998,
we continued to refine and sell our software, while expanding our offering to
include yield and performance improvement consulting services. In late 1998, we
began to sell our software and consulting services, together with our newly
developed proprietary technologies, as complete design-to-silicon yield
solutions, reflecting our current business model. In April 2000, we expanded our
research and development team and gained additional technology by acquiring
Applied Integrated Systems and Software GmbH, which develops software and
provides development services to the semiconductor industry.
Sources of Revenue
We derive revenue from two sources: design-to-silicon yield solutions and
an innovative arrangement we call gain share.
Design-to-Silicon Yield Solutions. Design-to-silicon yield solutions
revenue is derived from solution implementations, software and technology
licenses and software support and maintenance.
Our integration engineers implement our solutions by delivering, installing
and applying our software and other technologies to provide:
- assessment, which involves extensive diagnosis, analysis and
prioritization of yield loss components; and
- implementation, which involves modifications to the design or
manufacturing process to improve IC yield and optimize performance.
Solution implementations typically take 9 to 15 months to perform and our
customer contracts generally provide for fixed price milestone payments during
the course of the engagement. Revenue from solution implementations is
recognized on the percentage of completion method as we perform the services.
The majority of the software and other technologies that we license are bundled
with solution implementations. Accordingly, these license fees are recognized as
a component of solution implementation contracts. In some cases, we license
selected software and technologies without solution implementation services to
our existing customers. In addition, we may license our software and
technologies without services to potential strategic industry partners to
accelerate the adoption of our design-to-silicon yield solutions. If collection
of the resulting receivable is probable, the fee is fixed or determinable, and
vendor-specific objective evidence exists to allocate a portion of the total
license fee to any undelivered elements of the arrangement, then these license
fees are recognized upon delivery of our software or authorization codes.
Otherwise, these license fees are recognized over the term of the license.
Software support and maintenance fees are generally allocated based on vendor
specific objective evidence and recognized ratably over the term of the
maintenance agreement, typically 12 months.
Gain Share. In addition to the revenue we derive from our design-to-silicon
yield solutions, many of our solution implementation contracts provide that we
will receive revenue that varies based on the value we create for our customers.
To date, we have determined this value based on our customers' actual yield
improvements relative to a negotiated yield target, or baseline, for specified
products or processes. This
22
25
target is typically based on the customer's projected yield without our
solutions. We refer to these value-based fees as gain share. We have
historically determined gain share fees:
- as a percentage of the reduction in our customers' cost of goods sold or
a percentage of incremental revenue achieved by our customers, in each
case, relative to the baseline; or
- as a specified fee based on production milestones achieved by our
customers.
Our customer contracts typically contain limitations on the scope of our gain
share fees. Gain share may vary significantly because a customer's financial
benefits from yield improvements can be affected by forces that are beyond our
control, such as market demand for an end product, as well as a company's
internal manufacturing performance and pricing decisions. Typically, gain share
is measured on a quarterly basis, after mass production begins, and runs for
periods of time exceeding one year. We recognize gain share revenue following
agreement with our customers as to the level of performance achieved.
Stock-Based Awards
During the year ended December 31, 2000, we issued 2,605,486 common stock
options to employees at a weighted average exercise price of $2.73 per share.
The weighted average exercise price was below the weighted average deemed fair
value of $9.89 per share. The cumulative deferred stock-based compensation with
respect to these grants was $18.7 million, and is being amortized to expense on
an accelerated method over the four year vesting periods of the options. During
the year ended December 31, 2000, we amortized $6.6 million to stock-based
compensation expense and reversed $145,000 of deferred stock compensation for
cancelled common stock options. During the three months ended March 31, 2001, we
amortized $2.6 million to stock-based compensation expense and reversed $238,000
of deferred stock compensation related to repurchased common shares. The
deferred stock compensation balance of $9.1 million at March 31, 2001 will be
amortized over the remaining vesting periods through December 2004. Due to the
accelerated method of amortization, most of the deferred stock-based
compensation charge will be incurred over the first one to two years of the
vesting of the options. Through December 31, 1999 the cumulative deferred
stock-based compensation amortization related to non-employee awards was not
material. During the year ended December 31, 2000 and the three months ended
March 31, 2001 we recorded stock-based compensation amortization of
approximately $651,000 and $4,100, respectively, related to non-employee awards.
Customer Concentration
To date, a small number of integrated device manufacturers, or IDMs, have
accounted for virtually all of our total revenue. In the year ended December 31,
1998, two customers accounted for 82% of our total revenue, with Toshiba
representing 66% and Fujitsu representing 16%. In the year ended December 31,
1999, three customers accounted for 87% of our total revenue, with Toshiba
representing 53%, Fujitsu representing 19% and Sony representing 15%. In the
year ended December 31, 2000, four customers accounted for 84% of our total
revenue, with Toshiba representing 32%, Sony representing 27%, Conexant
representing 15% and Philips representing 10%. In the three months ended March
31, 2001, four customers accounted for 83% of our total net revenue, with
Toshiba representing 31%, Matsushita representing 20%, Conexant representing
17%, and Sony representing 15%.
To date, companies based in Japan have accounted for the majority of our
total revenue. Revenue generated from customers in Japan accounted for 82% in
the year ended December 31, 1998, 90% in the year ended December 31, 1999, and
66% in the year ended December 31, 2000 and the three months ended March 31,
2001. We expect that a significant portion of our total future revenue will
continue to be derived from companies based in Japan. Virtually all of our total
revenue generated internationally has been denominated in U.S. dollars.
Recent Acquisition
On April 27, 2000, we acquired all of the outstanding stock of Applied
Integrated Systems and Software GmbH, or AISS, for $1.25 million, consisting of
$995,000 in notes payable due on April 27, 2001 and $255,000 in cash. AISS
develops software and provides development services to the
23
26
semiconductor industry. The acquisition was accounted for using the purchase
method and our Consolidated Financial Statements reflect the results of
operations of AISS from the date of acquisition. The excess of the purchase
price over the fair value of the tangible assets and liabilities assumed was
$2.0 million which was allocated: $662,000 to acquired technology, $540,000 to
employee workforce and $807,000 to goodwill which are being amortized on a
straight line basis over a period of four years.
RESULTS OF OPERATIONS
We have historically experienced fluctuations from period to period. We
expect these fluctuations to continue, therefore historical results are not
indicative of future results.
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
Revenue
Total revenue increased 104% from $3.7 million for the three months ended
March 31, 2000 to $7.5 million for the three months ended March 31, 2001.
Design-to-Silicon Yield Solutions. Design-to-silicon yield solutions
revenue increased 162% from $2.2 million for the three months ended March 31,
2000 to $5.8 million for the three months ended March 31, 2001. The increase was
primarily attributable to a greater number of solution implementations during
the three months ended March 31, 2001.
Gain Share. Gain share revenue increased 19% from $1.5 million for the
three months ended March 31, 2000 to $1.8 million for the three months ended
March 31, 2001. This increase was due to the attainment of gain share from three
customers in the current period versus two customers in the prior year period.
Costs and Expenses
Costs of Design-to-Silicon Yield Solutions. Cost of design-to-silicon yield
solutions consists primarily of compensation, benefits and related personnel
costs of the engineers who perform system implementations and software support
and maintenance as well as allocated facilities costs. Cost of design-to-silicon
yield solutions increased from $1.3 million for the three months ended March 31,
2000 to $2.6 million for the three months ended March 31, 2001. The increase was
due to a greater number and increased average size of solution implementations.
As a percentage of design-to-silicon yield solutions, costs of design-to-
silicon yield solutions decreased from 57% for the three months ended March 31,
2000 to 44% for the three months ended March 31, 2001. This percentage decrease
was primarily the result of an increase in higher margin design-to-silicon yield
solutions contracts. We anticipate that our cost of design-to-silicon yield
solutions will increase in absolute dollars as we support an expanding number of
solution implementations.
Research and Development. Research and development expenses consist
primarily of compensation, benefits and related personnel costs of the engineers
engaged in research and development as well as allocated facilities costs.
Research and development expenses increased from $946,000 for the three months
ended March 31, 2000 to $2.7 million for the three months ended March 31, 2001.
The increase was due to our expanding research and development efforts in
software and technologies. As a percentage of total revenue, research and
development expenses increased from 26% for the three months ended March 31,
2000 to 35% for the three months ended March 31, 2001. A significant portion of
this increase was due to the addition of personnel and the increase in
personnel-related costs for development of existing and new technologies,
including as a result of our acquisition of AISS. We anticipate that we will
continue to commit considerable resources to research and development in the
future and that these expenses will continue to increase significantly in
absolute dollars.
Selling, General & Administrative. Selling, general and administrative
expenses consist primarily of compensation, benefits and related personnel costs
as well as allocated facilities costs, outside sales representative commissions,
recruiting and relocation costs, accounting and administrative expenses,
24
27
training, costs for legal and professional services and general corporate
expenses. Selling, general and administrative expenses increased from $1.4
million for the three months ended March 31, 2000 to $2.5 million for the three
months ended March 31, 2001. The increase was due to increased spending in
personnel and related costs and legal and other professional services in
connection with building the necessary administrative infrastructure to support
the growth of our operations. As a percentage of total revenue, selling, general
and administrative expenses decreased from 39% for the three months ended March
31, 2000 to 33% for the three months ended March 31, 2001. We expect that
selling, general and administrative expenses will increase in absolute dollars
to support increased selling and administrative efforts.
Stock-Based Compensation Amortization. Stock-based compensation
amortization expense increased from $458,000 for the three months ended March
31, 2000 to $2.6 million for the three months ended March 31, 2001. The increase
was attributable primarily to options granted to employees at exercise prices
below the deemed fair value of our common stock.
Interest and Other Income
Interest and other income increased from $17,000 for the three months ended
March 31, 2000 to $132,000 for the three months ended March 31, 2001. This
increase was due to higher average cash and short-term investment balances.
Provision for Taxes
Provision for taxes increased from $107,000 for the three months ended
March 31, 2000 to $185,000 for the three months ended March 31, 2001. These
provisions primarily represented foreign withholding taxes on certain revenue
from Japanese customers with the increase in 2001 resulting from an increase in
taxable income from worldwide operations.
YEARS ENDED DECEMBER 31, 1999 AND 2000
Revenue
Total revenue increased 70% from $11.8 million for the year ended December
31, 1999 to $20.1 million for the year ended December 31, 2000.
Design-to-Silicon Yield Solutions. Design-to-silicon yield solutions
revenue increased 47% from $10.6 million for the year ended December 31, 1999 to
$15.5 million for the year ended December 31, 2000. This increase was primarily
attributable to a greater number of solution implementations during the year
ended December 31, 2000 compared to the prior year.
Gain Share. Gain share revenue increased 266% from $1.3 million for the
year ended December 31, 1999 to $4.6 million for the year ended December 31,
2000. This increase was due to the attainment of gain share yield targets for
two new and one existing customer.
Costs and Expenses
Cost of Design-to-Silicon Yield Solutions. Cost of design-to-silicon yield
solutions increased from $4.1 million for the year ended December 31, 1999 to
$6.9 million for the year ended December 31, 2000. This increase was due to a
greater number and increased average size of solution implementations, as well
as the execution of our business strategy to aggressively increase capacity
ahead of revenue, resulting in the hiring of additional personnel. As a
percentage of design-to-silicon yield solutions revenue, cost of
design-to-silicon yield solutions increased from 39% for the year ended December
31, 1999 to 45% for the year ended December 31, 2000. This percentage increase
was primarily the result of increasing capacity in anticipation of expanding our
customer base and being awarded new design-to-silicon solutions contracts. We
anticipate that our cost of design-to-silicon yield solutions will increase in
absolute dollars as we support an expanding number of solution implementations.
We expect, however, that cost of design-to-silicon yield solutions revenue will
decrease as a percentage of design-to-silicon yield solution revenue in
25
28
the long term as capacity to deliver solution implementations is more
efficiently balanced with the number of ongoing solution implementation
contracts.
Research and Development. Research and development expenses increased from
$3.1 million for the year ended December 31, 1999 to $6.4 million for the year
ended December 31, 2000. This increase was due to our expanding research and
development efforts in software and technologies. As a percentage of total
revenue, research and development expenses increased from 26% for the year ended
December 31, 1999 to 32% for the year ended December 31, 2000. A significant
portion of this increase was due to the addition of personnel and the increase
in personnel-related costs for development of existing and new technologies,
including as a result of our acquisition of AISS. We anticipate that we will
continue to commit considerable resources to research and development in the
future and that these expenses will continue to increase significantly in
absolute dollars.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $4.3 million for the year ended December 31, 1999 to
$7.3 million for the year ended December 31, 2000. This increase was due to
increased spending in personnel and related costs and legal and other
professional services in connection with building the necessary infrastructure
to support the growth of our operations. As a percentage of total revenue,
selling, general and administrative expenses remained consistent at 36% for the
year ended December 31, 1999 and 2000. We expect that selling, general and
administrative expenses will increase in absolute dollars to support increased
selling and administrative efforts.
Offering Costs. Costs of approximately $1.3 million related to this
offering were expensed during the quarter ended December 31, 2000 due to
protracted delays in this offering.
Stock-Based Compensation Amortization. Stock-based compensation
amortization expense increased from approximately $68,000 during the year ended
December 31, 1999 to $7.3 million during the year ended December 31, 2000. The
increase was attributable primarily to options granted to employees at exercise
prices below the deemed fair value of our common stock.
Interest and Other Income
Interest and other income increased from approximately $105,000 for the
year ended December 31, 1999 to approximately $347,000 for the year ended
December 31, 2000. This increase was due to higher average cash and short-term
investment balances.
Provision for Taxes
Provision for taxes decreased from approximately $533,000 for the year
ended December 31, 1999 to approximately $363,000 for the year ended December
31, 2000. This decrease in provision for taxes primarily resulted from a
decrease in foreign withholding taxes partially offset by an increase in taxable
income from U.S. operations.
YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenue
Total revenue increased 90% from $6.2 million for the year ended December
31, 1998, to $11.8 million for the year ended December 31, 1999.
Design-to-Silicon Yield Solutions. Design-to-silicon yield solutions
revenue increased 70% from $6.2 million for the year ended December 31, 1998, to
$10.6 million for the year ended December 31, 1999. These increases were
primarily the result of a greater number and size of solution implementations.
Gain Share. Gain share revenue increased from zero for the year ended
December 31, 1998, to $1.3 million for the year ended December 31, 1999. This
increase was due to the introduction of our gain share business model in late
1998 and the achievement of yield improvements over negotiated contract
baselines.
26
29
Costs and Expenses
Cost of Design-to-Silicon Yield Solutions. Cost of design-to-silicon yield
solutions increased from approximately $1.5 million for the year ended December
31, 1998, to $4.1 million for the year ended December 31, 1999. As a percentage
of design-to-silicon yield solutions revenue, cost of design-to-silicon yield
solutions increased from 25% for the year ended December 31, 1998, to 39% for
the year ended December 31, 1999. This increase in absolute dollars and as a
percentage of design-to-silicon yield solutions revenue was due to the hiring of
additional engineers as we built our solution implementation teams in
anticipation of increased demand for our solutions.
Research and Development. Research and development expenses increased from
$1.9 million for the year ended December 31, 1998, to $3.1 million for the year
ended December 31, 1999. This increase was due to an increase in personnel and
related costs. As a percentage of total revenue, research and development
expenses decreased from 30% for the year ended December 31, 1998, to 26% for the
year ended December 31, 1999.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $3.0 million for the year ended December 31, 1998, to
$4.3 million for the year ended December 31, 1999. This increase was due to
additional personnel and related costs, outside sales representative
commissions, recruiting and relocation costs, accounting and administrative
expenses, training and costs for legal and professional services. As a
percentage of total revenue, selling, general and administrative expenses
decreased from 48% for the year ended December 31, 1998, to 36% for the year
ended December 31, 1999.
Stock-Based Compensation Amortization. Stock-based compensation
amortization expense increased from approximately $61,000 for the year ended
December 31, 1998, to approximately $68,000 for the year ended December 31,
1999. This increase was primarily attributable to timing of the vesting of
options and warrants granted to non-employees and the resulting revaluation of
compensation expense related to such vested options and warrants.
Interest and Other Income
Interest and other income decreased from approximately $128,000 for the
year ended December 31, 1998, to approximately $105,000 for the year ended
December 31, 1999. This decrease was due to lower average balances of cash and
cash equivalents.
Tax Provision
The tax provision increased from approximately $341,000 for the year ended
December 31, 1998, to approximately $533,000 for the year ended December 31,
1999. These provisions primarily represented foreign withholding taxes on some
revenue from Japanese customers. This increase was attributable to the increased
number of contracts and the revenue subject to these withholding requirements.
NINE QUARTERS ENDED MARCH 31, 2001
The following tables set forth our consolidated statement of operations
data for each quarter in the nine quarters ended March 31, 2001. This unaudited
quarterly information has been prepared on the same basis as our audited
Consolidated Financial Statements and, in the opinion of management, includes
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of such data. We believe that quarterly revenues,
particularly the mix of the revenue components, and operating
27
30
results are likely to vary significantly in the future and that period-to-period
comparisons of our results of operations should not be relied upon as
indications of future performance.
QUARTER ENDED
-------------------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001
------- -------- -------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue:
Design-to-silicon yield
solutions..................... $2,451 $2,883 $2,575 $2,658 $2,194 $ 3,774 $ 4,490 $ 5,080 $ 5,753
Gain share...................... -- -- 500 757 1,500 808 848 1,441 1,781
------ ------ ------ ------ ------ ------- ------- ------- -------
Total revenue................. 2,451 2,883 3,075 3,415 3,694 4,582 5,338 6,521 7,534
------ ------ ------ ------ ------ ------- ------- ------- -------
Costs and expenses:
Cost of design-to-silicon yield
solutions..................... 722 1,100 1,133 1,136 1,252 1,653 1,887 2,123 2,556
Research and development........ 650 594 816 1,027 946 1,296 1,817 2,359 2,657
Selling, general and
administrative................ 1,142 1,060 1,084 1,009 1,446 1,579 2,239 2,069 2,454
Offering costs.................. -- -- -- -- -- -- -- 1,258 --
Stock-based compensation
amortization.................. (13) 13 27 41 458 1,235 2,896 2,703 2,557
------ ------ ------ ------ ------ ------- ------- ------- -------
Total costs and expenses...... 2,501 2,767 3,060 3,213 4,102 5,763 8,839 10,512 10,224
------ ------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from operations..... (50) 116 15 202 (408) (1,181) (3,501) (3,991) (2,690)
Interest income and other......... 27 25 26 27 17 24 114 192 132
------ ------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before taxes........ (23) 141 41 229 (391) (1,157) (3,387) (3,799) (2,558)
Tax provision..................... 201 100 102 130 107 166 239 (149) 185
------ ------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)................. $ (224) $ 41 $ (61) $ 99 $ (498) $(1,323) $(3,626) $(3,650) $(2,743)
====== ====== ====== ====== ====== ======= ======= ======= =======
The trends discussed in the annual comparisons of operating results from
1998 through 2000, generally apply to the comparisons of results for our nine
most recent quarters ended March 31, 2001.
A significant portion of our revenue has been, and will continue to be,
derived from a small number of substantial contracts with large corporations,
which involve extended contract negotiations. We attempt to maximize utilization
of our implementation teams by minimizing the time between completion of one
solution implementation and commencement of the next. Accordingly, the timing
and performance of these contracts may cause material fluctuations in our
operating results, particularly on a quarterly basis, although in the past this
has been offset by gain share revenue resulting from previous engagements. For
example, design-to-silicon yield solutions revenue decreased from the second
quarter of 1999 to the third quarter of 1999 and from the fourth quarter of 1999
to the first quarter of 2000 as a result of a delay between completion of
existing solution implementations and commencement of the next.
Some of our gain share arrangements provide for non-recurring incentive
payments upon the achievement of negotiated yield targets within a specified
time. Gain share revenue may increase significantly in the quarter in which
these targets are met. For example, in the first quarter of 2000, we recognized
revenue in connection with the achievement of one of these targets. In addition,
our quarterly operating results, particularly as they pertain to gain share,
have in the past and will in the future vary significantly depending upon
factors such as our customers' production cycles, our customers' ability to
measure, on a timely basis, the performance of their production facilities,
changes in market demand for our customers' products, and our ability to deliver
results above negotiated gain share baselines. These factors, among others, have
made and will continue to make gain share revenues difficult to forecast.
Historically, research and development expenses have fluctuated depending
on the rate of hiring engineers and on whether we use engineering resources for
development projects or solution implementations. For example, in the fourth
quarter of 1999, our research and development expenses increased due to these
factors.
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Selling, general and administrative expense levels have remained in a
narrow range over most of the past eight quarters. Recently, expenses have
increased in the sales, marketing, finance and administration functions as we
have built the infrastructure necessary to support the growth of the business.
In addition, expenses such as sales commissions and relocation of employees may
vary from quarter to quarter as was the case in the third and fourth quarters of
2000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily with the net
proceeds from the sale of common and preferred stock, which has amounted to a
total of $8.8 million and, to a lesser extent, from cash flow from operations,
bank borrowings and capital equipment leases.
On December 4, 1995, we issued 5,833,331 shares of Series A preferred stock
at $.60 per share resulting in net proceeds of $3.5 million. On August 4, 2000,
we issued 350,872 shares of Series B preferred stock at $14.25 per share
resulting in net proceeds of $5.0 million.
Net cash provided by operating activities was approximately $212,000 for
the year ended December 31, 1998, approximately $272,000 for the year ended
December 31, 1999, and approximately $1.9 million for the year ended December
31, 2000. Net cash provided by operating activities in 1998 was the result of
decreases in accounts receivable and increases in accounts payable and other
accrued liabilities partially offset by a loss and a decrease in deferred
revenues. Net cash provided by operating activities in 1999 resulted from
increases in accrued compensation and related benefits and net income, after
adjustment for depreciation and amortization, partially offset by increases in
accounts receivable. Net cash provided by operating activities in 2000 was the
result of increases in accounts payable and accrued expenses of approximately
$1.6 million, billings in excess of recognized revenue of approximately $1.1
million and deferred revenues of approximately $1.5 million, partially offset by
a net loss of approximately $968,000 and increases in accounts receivable of
approximately $815,000 and prepaid expenses and other assets of approximately
$540,000. The net loss for the period of approximately $968,000, was adjusted
for depreciation and amortization, including amortization of deferred stock
compensation costs of $7.3 million. Net cash used in operating activities was
approximately $339,000 for the three months ended March 31, 2001. This resulted
primarily from decreases in accrued expenses of approximately $884,000 and
increases in accounts receivable and prepaid expenses and other assets of
approximately $178,000, partially offset by net income of approximately $123,000
after adjustment for depreciation and amortization, including amortization of
deferred stock compensation cost of $2.6 million, and increases in deferred
revenues of approximately $353,000, billings in excess of recognized revenue of
approximately $141,000 and accounts payable of approximately $104,000. The
increase in deferred revenues for the year ended December 31, 2000 and the three
months ended March 31, 2001 was due primarily to advance payments from customers
under license and maintenance agreements. The increase in accounts receivable
for the year ended December 31, 2000 and the three months ended March 31, 2001
was attributable to performance under an increased number of contracts.
Net cash used in investing activities was approximately $281,000 for the
year ended December 31, 1998, approximately $537,000 for the year ended December
31, 1999, approximately $1.4 million for the year ended December 31, 2000 and
approximately $412,000 for the three months ended March 31, 2001. Net cash used
in investing activities in 1998 and 1999 and in the three months ended March 31,
2001 was primarily the result of purchases of property and equipment consisting
primarily of computer hardware and software and office furniture. Net cash used
in investing activities in 2000 was primarily due to the purchase of property
and equipment of approximately $1.2 million and the acquisition of AISS for
$995,000 in promissory notes and $255,000 in cash.
Net cash provided by financing activities was approximately $16,000 for the
year ended December 31, 1998 and approximately $42,000 for the year ended
December 31, 1999. Net cash provided by financing activities was approximately
$5.2 million for the year ended December 31, 2000, primarily due to the issuance
of Series B convertible preferred stock. Net cash provided by financing
activities of $1,800 for the
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three months ended March 31, 2001 was the result of collection of notes
receivable from shareholders, partially offset by principal payments on
long-term debt.
In connection with our acquisition of AISS, we issued $995,000 in
promissory notes on April 27, 2000. The principal amount, plus interest at 7%
per annum, was paid on April 27, 2001.
We expect to experience significant growth in our operating expenses,
particularly for research and development and additions to our workforce in
order to execute our business plan. As a result, we anticipate that our
operating expenses, as well as planned capital expenditures, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund potential acquisitions of complementary products, technologies or
businesses. We believe that the net proceeds from this offering and the
concurrent private placement together with our existing cash resources,
available bank financing and anticipated funds from operations, will satisfy our
cash requirements for at least the next twelve months. In the event additional
financing is required, we may not be able to raise it on acceptable terms or at
all.
EURO-CURRENCY
The Single European Currency, or Euro, was introduced on January 1, 1999,
with complete transition to this new currency required by January 2002. In
connection with our acquisition of AISS, we are currently assessing the issues
raised by the introduction of the Euro, but we do not expect that required
changes, if any, will have a material effect on our business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
will require us to record derivatives on our balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The Company
adopted SFAS No. 133, as amended, on January 1, 2001. The adoption of this
statement did not have an effect on the Company's financial position, results of
operations or cash flows as the Company had no stand-alone or embedded
derivatives at December 31, 2000 and had not historically entered into any
derivative transactions to hedge currency or other exposures.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. We adopted the applicable
disclosure requirements of SFAS No. 140 in our consolidated financial statements
as of December 31, 2000. We are currently evaluating the impact of adopting the
remaining provisions of SFAS No. 140 which will be effective for transactions
entered into after March 31, 2001.
MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates and foreign currency exchange rates. We do not currently own any
equity investments, nor do we expect to own any in the foreseeable future. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors.
Interest Rate Risk. As of March 31, 2001 we had cash and equivalents of
$6.9 million, consisting of cash and highly liquid money market instruments with
maturities of less than 90 days. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair value of the portfolio. We would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest on our portfolio. As of March 31, 2001, we
had outstanding notes payable of $995,000 which bear interest at a fixed rate of
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7%. The fair value of these notes approximated the recorded value at March 31,
2001. Changes in market interest rates will affect the fair market value of
these notes. A hypothetical increase in market interest rates of 10% from the
market rates in effect at March 31, 2001 would cause the fair value of these
investments and notes payable to decrease and increase, respectively, by an
immaterial amount and would not have significantly impacted our financial
position or results of operations. Declines in interest rates over time will
result in lower interest income and increased interest expense.
Foreign Currency and Exchange Risk. Virtually all of our revenue is
denominated in U.S. dollars, although such revenue is derived substantially from
foreign customers. Foreign sales to date, generated by AISS since the date of
its acquisition, have been invoiced in local currencies, creating receivables
denominated in currencies other than the U.S. dollar. The risk due to foreign
currency fluctuations associated with these receivables is partially reduced by
local payables denominated in the same currencies, and presently we do not
consider it necessary to hedge these exposures. We intend to monitor our foreign
currency exposure, and may use financial instruments to limit this exposure.
There can be no assurance that exchange rate fluctuations will not have a
materially negative impact on our business.
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BUSINESS
OVERVIEW
Our comprehensive technologies and services enable semiconductor companies
to improve yield and performance of integrated circuits by providing
infrastructure to integrate the design and manufacturing processes. We believe
that our solutions significantly improve a semiconductor company's time to
market, the rate at which yield improves and product profitability. Our
design-to-silicon yield solutions combine proprietary manufacturing process
simulation, yield and performance modeling software, comprehensive test chips,
proven yield and performance enhancement methodologies, and professional
services. The result of implementing our solutions is the creation of value that
can be measured based on improvements to our customers' actual yield. We receive
recurring revenue based on this value by aligning our financial interests with
the demonstrated yield and performance improvement realized by our customers. To
date, we have sold our technologies and services to, and we have established
ongoing relationships with, key integrated device manufacturers such as Toshiba
Corporation, Conexant Systems, Inc., Sony Corporation, Philips Semiconductor,
and Texas Instruments Incorporated.
INDUSTRY BACKGROUND
Integrated circuits, or ICs, are critical components used in an
increasingly wide variety of applications, such as computer systems; Internet
and communications infrastructure equipment, including wireless and network
devices; and consumer products including cellular phones, pagers, personal
digital assistants, game consoles and network appliances. As IC performance has
increased and size and cost have decreased, the use of ICs in these applications
has grown significantly. According to a November 2000 report by the
Semiconductor Industry Association, the worldwide semiconductor market is
expected to grow from $149 billion in 1999 to $319 billion in 2003. A large part
of this growth is expected to occur in deep submicron ICs having circuit
component feature sizes, or geometries, that measure less than 0.20 microns, or
millionths of a meter. ICs are manufactured onto silicon disks, commonly
referred to as wafers. According to an April 2001 report by VLSI Research, the
demand for deep submicron silicon wafers, which are wafers with a linewidth of
less than 0.2 micron, is estimated to grow at a compound annual rate in excess
of 48.6% from 1999 to 2005. Rapid technological innovation has shortened product
life cycles, which fuels the economic growth of the semiconductor industry.
Customers for electronic products continue to demand new applications with
more power, reduced cost and smaller size. As a result, IC companies are
adopting new designs, process technologies and materials at an unparalleled
rate. For example, silicon germanium processes will be integrated with standard
logic processes to provide better performance for radio-frequency components in
communication ICs.
In addition, the IC industry faces compression in product lifecycles.
Previously, companies could afford to take months, or years in some cases, to
integrate their new design and manufacturing processes. With traditional product
life cycles, IC companies ramped production slowly, produced at high volume once
the product hit its prime, and slowly reduced production volume when the price
and the demand started to decrease near the end of its life cycle. More
recently, demand -- largely driven by consumers in search of the next, more
powerful, smaller device -- has dramatically reduced the time that semiconductor
companies have to successfully bring a product to market in high volumes.
Companies now need to sell the most volume when a product is first introduced
and has a performance and pricing advantage over its competition, or they will
lose the market opportunity and the related high revenue.
Increased IC complexity and compressed product lifecycles create
significant challenges to achieving competitive yields and optimizing
performance. Yield is the percentage of ICs produced that meet customers'
specifications. For example, it is not uncommon for an initial manufacturing run
to yield only 20%, meaning 80% of those wafers were wasted. Yield improvement
and performance optimization are critical drivers of IC companies' financial
results because they typically lead to cost reduction and revenue generation
concurrently, causing a leveraged effect on profitability. Historically, yield
loss resulted primarily
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from contamination in the IC manufacturing process. The dominant factor of yield
loss with deep submicron ICs has shifted from contamination to:
- systematic yield loss, or non-functioning ICs resulting from the lack of
compatibility between the design and manufacturing processes; and
- performance yield loss, or functioning ICs that do not meet customer
speed requirements.
Manufacturers have historically addressed systematic and performance yield
loss reactively and almost exclusively by inefficient and time consuming
trial-and-error adjustments to the manufacturing process.
Disaggregation of the semiconductor industry has further complicated IC
companies' ability to maximize yield. Historically, leading semiconductor
companies designed, manufactured and tested their ICs internally, thus retaining
design-manufacturing integration know-how. Today, the industry is comprised of
organizations as well as separate companies that specialize in a particular
phase of designing and manufacturing ICs. This has resulted in a fragmentation
of the knowledge related to the integration of IC design and manufacturing.
The combination of increasingly complex ICs and design and manufacturing
processes, reduced time to produce new products in high volumes and the loss of
information due to disaggregation has left a gap between the design of an IC and
its manufacture. We call this gap the design-to-silicon yield gap. This gap
creates a number of significant problems for semiconductor companies, including:
- Slow Yield Ramp. Increased process and design complexity extends the time
needed to arrive at acceptable yields and increases the time it takes for
a semiconductor company to begin producing at high volumes, directly and
negatively impacting a company's potential market share and potential
revenue.
- Longer Time to Market and Increased Up-front Costs. Yield problems in the
initial manufacturing phase result in numerous design and process
iterations that delay product introductions and appreciably increase
up-front costs, such as non-recurring engineering, mask-set redesigns and
excessive sample wafers.
- High Cost of Goods Sold. Processed wafer costs are typically the largest
component of an IC company's cost of goods sold and, therefore, yield
loss significantly increases costs.
- Difficulties Producing High-Performance ICs. High-performance ICs are
particularly sensitive to the lack of compatibility between design and
manufacturing. In addition, semiconductor companies typically experience
a trade-off between yield and IC performance because it is generally more
difficult to produce ICs with more stringent specifications.
Semiconductor companies may target high-performance ICs because they
typically have higher margins.
Delivering complex ICs quickly and in high volumes requires unique silicon
infrastructure solutions to tightly integrate the IC design and manufacturing
processes -- thus bridging this design-to-silicon yield gap.
THE PDF SOLUTION
We provide comprehensive silicon infrastructure technologies and services
to address and bridge the design-to-silicon yield gap. Our solution combines
proprietary manufacturing process simulation software, yield and performance
modeling software, comprehensive test chips, proven yield and performance
enhancement methodologies and professional services to increase yield,
accelerate yield ramp and improve IC performance. We create a prioritized
analysis of yield loss mechanisms to identify, quantify and correct the issues
that cause yield loss, often before an IC design is complete. This drives IC
design and manufacturing improvements that enable our customers to achieve and
exceed targeted IC yield and performance earlier in product life cycles. Our
solution is designed to increase the initial yield when a design first enters a
manufacturing line, increase the rate at which that yield improves, and allow
subsequent product designs to be added to manufacturing lines more quickly and
easily. Because our
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design-to-silicon yield solutions dramatically and quickly improve a
semiconductor company's time to market and yield ramp -- and ultimately product
profitability -- we tie our revenue to these improvements through a unique
approach that we call gain share. Gain share is the percentage we receive of our
customers' incremental cost savings or incremental revenue associated with
improved yields and accelerated ramp or may be a specified fee based on
production milestones achieved by our customers.
The following graphically depicts the integration of IC design with
manufacturing processes using our design-to-silicon yield solutions.
[The diagram depicts the connection between IC design and manufacturing.]
The key benefits of our solution to our customers are:
Faster Time to Market. Our design-to-silicon yield solutions are designed
to significantly accelerate our customers' time to market and increase product
profitability. Our solutions, which predict and improve product yield even
before IC product design is complete, change the traditional design-to-silicon
sequence to primarily a concurrent process, and decrease our customers' time to
market. Systematically incorporating knowledge of the integration of the design
and manufacturing processes into software modules, enables faster introduction
of additional products with consistently high initial yields. Our design-
to-silicon yield solutions decrease design and process iterations, reduce our
customers' up-front costs and speed time to market, thus providing our customers
with early-mover advantages such as increased market share and higher selling
prices.
Faster Time to Volume. After achieving higher initial yields and faster
time to market, our design-to-silicon yield solutions are designed to enable our
customers to isolate and eliminate remaining systematic yield issues to achieve
cost efficient manufacturing volume. Once a manufacturing process has been
modeled using our solutions, our customers are able to diagnose problems and
simulate potential corrections more quickly than using traditional methods. In
addition, if process changes are required, improvements can be verified more
quickly using our technology than using traditional methods. Our
design-to-silicon yield solutions enable our customers to quickly reach cost
efficient volume, so that they are able to increase revenue, improve their
competitive position, and capture higher market share.
Increased Manufacturing Efficiencies. After using our design-to-silicon
yield solutions for product introduction and yield ramp, our solutions are
designed to allow our customers to achieve a higher final yield and therefore a
lower cost of goods sold. In addition, our design-to-silicon yield solutions are
designed to provide our customers with the ability to proactively monitor
process health to avoid potential yield problems. By paying us gain share as our
customers recognize cost savings from these manufacturing efficiencies, they
also benefit from better matching their costs to their revenue.
Increased Semiconductor Performance. Our design-to-silicon yield solutions
are designed to enable our customers to achieve over-all higher level
semiconductor performance by modeling the factors that affect speed and
simulating possible improvements. Typically, the changes necessary to achieve
higher performance result in an overall reduction in yield. Because our
design-to-silicon yield solutions also model
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the factors that affect yield at the same time, our customers can often achieve
both higher IC performance and higher yield, thereby generating higher margin
revenues.
OUR STRATEGY
Our objective is to provide the industry standard in design-to-silicon
yield solutions. Key elements of our strategy include:
Leverage Our Innovative Gain Share Business Model. We intend to expand the
gain share component of our customer contracts. We believe this innovative
approach helps us to form highly collaborative and longer-term relationships.
Working closely with our customers on their core technologies with a common
focus on their business results provides direct and real-time feedback, which we
will continue to use to rapidly generate market-driven improvements that add
value to our solutions. We also believe that gain share allows us to increase
penetration of our customer accounts because adding new semiconductor products
to existing lines is increasingly easy and economical for our customers once our
design-to-silicon yield solutions are implemented. As our gain share customers
succeed in improving their yield and performance while reducing costs, we
believe that we will generate new customer accounts based on these successes.
Focus on Key IC Product Segments. We intend to focus our solution on key IC
product segments such as system-on-a-chip, communications networking, graphics
and high-performance central processing units. These are high-volume,
high-growth segments and are fueled by the growth of Internet and wireless
infrastructure and consumer applications. As a result, we will expand our
solution for key technology drivers such as low-k dielectrics, copper, embedded
DRAM and silicon germanium, which are all new and relatively complex
manufacturing process technologies. We believe that these product segments are
particularly attractive because they include complex IC design and manufacturing
processes where processed silicon is costly and yield is critical.
Expand Strategic Relationships with Industry Leaders. We intend to extend
and enhance our relationships with leading companies at key stages of the
design-to-silicon process, such as manufacturing equipment vendors, silicon
intellectual property vendors, semiconductor foundries, and test and assembly
equipment providers. We believe that strategic relationships with industry
leaders will increase our insight into future industry needs, thus allowing us
to further accelerate our learning and enhance the value of our solutions. We
expect these relationships to also serve as sales channels for our
design-to-silicon yield solutions and to increase industry awareness of our
solutions.
Extend Our Technology Leadership Position. We intend to continue expanding
our research and development efforts by leveraging our experienced engineering
staff and codifying the knowledge that we continually acquire in our solution
implementations. In addition, we intend to selectively acquire complementary
businesses and technologies to increase the scope of our solutions. We will
continue to make significant investments in the development of proprietary
manufacturing process simulation software, yield and performance modeling
software, other technologies, and yield and performance enhancement
methodologies to accommodate our customers' increasingly complex semiconductor
needs.
Expand Worldwide Presence. We intend to establish engineering design and
product development centers in key international locations around the world. To
date, we have focused on regions specific to our design efforts -- the United
States, Japan and Europe. We intend to expand geographically to gain access to
international engineering talent and to maintain proximity to our expanding
customer base. In addition, we believe that these efforts will have collateral
sales and marketing benefits as a result of local presence.
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TECHNOLOGY
Our design-to-silicon yield solutions combine proprietary manufacturing
process simulation, yield and performance modeling software, comprehensive test
chips and proven yield and performance enhancement methodologies. To calculate
the likely yield of an IC design, we have designed a proprietary process that
uses each of these technologies to:
- identify yield-relevant layout pattern elements by using the knowledge
base embedded in our technologies;
- categorize IC layout components into these elements;
- quantify the yield of each of the elements; and
- model the frequency of yield-relevant elements and their yield-loss
probabilities.
We continually enhance our technologies through the codification of
knowledge that we gain in our solution implementations.
Our software incorporates the following elements:
- efficient modeling algorithms of the interaction between design layout
and manufacturing processes, which creates layout pattern-dependent
systematic yield models that encompass process technologies such as
lithography, etch, interlayer dielectric chemical-mechanical polishing
(ILD CMP), copper CMP and shallow trench isolation CMP (STI CMP);
- pattern recognition algorithms, which allow us to categorize the
yield-relevant elements of a design as a function of their layout,
including the effects of their proximity to other elements;
- a hierarchical representation of the layout, which encompasses layout
manufacturing process proximity effects and minimizes the time necessary
for computation of systematic yield prediction;
- algorithms that compute an overall yield impact matrix for design as a
function of layout elements and manufacturing yield models;
- statistical simulation of circuit performance as a function of
manufacturing process variations, including their impact on transistor
performance; and
- statistical process and device simulation.
Our software that is used to predict yields of designs is also used to
generate test chips, or characterization vehicles. These characterization
vehicles, or CVs, are used to calibrate the yield models and to provide
manufacturers with early prediction of product yields, often before the IC
design is completed. Early prediction generated by the CVs is the basis of the
yield improvement methodologies for the manufacturing line. Information
generated by the CVs is also used to improve the IC design.
Our methodologies are a series of guidelines that our implementation teams
use to drive our customers' adoption of our software and CVs to quantify the
yield impact of each module of the process and design block, simulate the impact
of changes to the design and manufacturing process, and analyze the outcome of
executing such changes.
PRODUCTS AND SERVICES
Our design-to-silicon yield solutions consist of integration engineering
services, proprietary software and other technologies. Our proprietary software
and other technologies include proprietary manufacturing process simulation
software, yield and performance modeling software, and comprehensive test chips.
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We tailor our solution to our customers' specific business issues by
offering one of the following design-to-silicon yield solutions:
- Integration and Ramp. This solution enables our customers to ramp the
yield of new products when the manufacturing process or fabrication
facility is new. Our solution is used to improve the process capability
and manufacturability of designs targeted for that process.
- Yield and Performance Ramp. This solution enables our customers to ramp
the yield and performance of new products when the manufacturing process
is assumed to be mostly correct and complete. In this case, we focus on
design oriented issues.
Our design-to-silicon yield solutions can incorporate various software and
other technologies, typically including the following:
- Characterization Vehicles and Characterization Vehicle Software. Our
integration engineers develop a design of experiments, or DOE, to
determine how IC design building blocks interact with the manufacturing
process. Our software utilizes the DOE, as well as a library of these
building blocks that we know have potential yield and performance impact,
to generate comprehensive test chips that we call Characterization
Vehicles(TM), or CVs. These CVs are run through the manufacturing process
with intentional modifications to explore the effects of natural
manufacturing process variations. Our CV analysis software is then used
to analyze the electrical test results generated by the test chips to
model the yield and performance effects of process variations on these
design building blocks.
- pdEx(TM) pdEx analyzes an IC design to compute its systematic and
contamination yield loss. pdEx takes as input, a layout that is typically
in industry standard format, yield models generated by running our CVs,
other test chip data and other in-line inspection systems. pdEx is
designed to estimate the yield loss due to optical proximity effects,
etch micro loading, dishing in chemical-mechanical polishing and
contamination, as well as a number of other basic process issues.
- Circuit Surfer(R) Circuit Surfer estimates the performance yield and
manufacturability of small blocks in a design, such as analog subsystems
or critical paths of digital blocks. Using Circuit Surfer, a design
engineer is able to estimate how manufacturing process variations will
impact circuit performance.
- pdFab(R) pdFab provides a framework for statistical manufacturing process
and transistor simulation that enables our integration engineers to
understand the effects of expected or measured manufacturing process
variations on transistor performance. pdFab is used to optimize the
transistor architecture and associated manufacturing process, and is
primarily targeted to provide higher IC performance, although yield
improvements may also be generated.
- Optissimo(R) Optissimo is used to optimize the layout of a design to
minimize the impact of wafer printing variations due to optical proximity
effects. Optissimo can be used for model based optical proximity
correction technologies.
While the primary distribution method for our software and technologies is
through our design-to-silicon yield solutions, we have in the past and may in
the future separately license these and other technologies.
CUSTOMERS AND CASE STUDIES
Customers
Our current customers are primarily large integrated device manufacturers,
or IDMs. We have established ongoing relationships with key IDMs such as Toshiba
Corporation, Sony Corporation, Conexant Systems, Inc., Philips Semiconductor and
Texas Instruments Incorporated. Our customers' targeted product segments vary
significantly, including microprocessors, graphics, memory, and communi-
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cations. We believe that the adoption of our solutions by such diverse and
technologically advanced companies validates the application of our
design-to-silicon yield solutions to the broader market.
Case Studies
TOSHIBA CORPORATION -- one of the world's leading semiconductor
manufacturers with IC and end product revenue over $50 billion.
Challenge: To meet the anticipated large market demand for a new
consumer product, Toshiba sought to ramp production of a
very large, complex system-on-a-chip, or SoC. A chip of this
size and complexity had not previously been manufactured at
the projected high volumes.
Solution: Toshiba utilized our design-to-silicon yield solution to
identify and quantify potential yield loss components and
their root causes, and to monitor continuing manufacturing
process health. Our CVs and analyses continuously identified
yield issues and prioritized the causes by yield impact,
which Toshiba used to drive proactive improvements to ensure
that SoC yields would be on target. Toshiba made numerous
design and manufacturing changes, so that the design and
manufacturing process were already co-optimized to yield
well by the time the SoC was inserted into mass production.
In addition, our solution was used to improve the transistor
architecture for significantly better transistor
performance, which resulted in higher IC performance yield.
Impact: The SoC yield ramp rate greatly exceeded the industry
benchmark ramp rates, increased the capacity of the
fabrication facility and enabled Toshiba to meet the market
demand. We continue to work very closely with Toshiba on the
next generation of this process and SoC.
CONEXANT SYSTEMS, INC. -- one of the world's leading pure-play
communications IC producers with IC revenue in excess of $2 billion.
Challenge: Conexant sought to achieve consistently high yields of a
specific product across existing internal and external
manufacturing processes. This was exacerbated by the added
complexities of disparate design rules in each of the
facilities.
Solution: We worked with Conexant to identify, quantify and prioritize
yield loss components and their root causes to drive yield
improvements for an archetypal product. These improvements
were also expected to apply to other Conexant products. Our
proprietary technology allowed our team to uncover the two
major systematic causes of low yield for this product -- the
first was an inconsistency in the design rules that
specified how layers of metals were connected to each other,
or borderless contacts, and the second was a problem in the
transistor to transistor interconnect. We worked with
Conexant to identify layout changes to compensate for
process differences across the manufacturing facilities. Our
team used our software simulation capability to predict the
yield improvement and ensure that proposed changes were
optimal.
Impact: In three months, we increased yields dramatically for the
archetypal product. In addition, the corrections implemented
for the archetypal product were applied to many products in
the 0.25 micron technology. We continue to work closely with
Conexant on the next generation of its processes and
products.
SALES AND MARKETING
Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and strategic alliances. To date, we have targeted
leading IDMs to validate our solutions in leading technology and manufacturing
environments and to establish credibility to support future sales and marketing
efforts. We expect to extend these efforts to other IDMs and fabless
semiconductor companies. For sales in the United States, we rely on our direct
sales team, which primarily operates out of our San Jose, California
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headquarters. In Japan we use our direct sales team as well as Innotech
Corporation, a large semiconductor sales and distribution company located in
Japan. Innotech has been instrumental in providing introductions to key
executives with some of our targeted customers, which has allowed us to
establish direct relationships with these key executives. We expect to continue
establishing strategic alliances with vendors in the electronic design
automation software, capital equipment for IC production, silicon intellectual
property and mask-making software segments to create and take advantage of
co-marketing opportunities. We believe that these relationships will also serve
as sales channels for our design-to-silicon yield solutions and to increase
industry awareness of our solutions.
We strive to provide compelling value in our initial engagement to
establish ourselves as a key vendor to our customers and solidify relationships
at the executive level. Early in the solution implementation, our engineers
establish relationships across the organization and gain a solid understanding
of our customers' business issues. Our direct sales and solution implementation
teams combine their efforts to deepen our customer relationships by expanding
our penetration across the customer's products, processes and technologies. This
close working relationship with the customer has the added benefit of helping us
identify new product areas and technologies in which we should next focus our
research and development efforts. We believe that our sales and marketing
efforts will facilitate the adoption of our design-to-silicon yield solutions as
the industry standard.
RESEARCH AND DEVELOPMENT
Our research and development focuses on rapidly developing and introducing
new proprietary technologies, software products and enhancements to our existing
design-to-silicon yield solutions. We use a rapid-prototyping paradigm in the
context of the customer engagement to achieve these goals. In addition, we have
a highly-qualified technical advisory board comprised of professors from Harvard
University's Business School, the Massachusetts Institute of Technology,
Carnegie Mellon University and the University of California, Berkeley to help us
develop and guide our strategic development roadmap.
We have made and expect to continue to make substantial investments in
research and development. The complexity of our design-to-silicon yield
technologies requires expertise in physical IC design and layout, transistor
design and semiconductor physics, semiconductor process integration, numerical
algorithms, statistics, and software development. We believe that the
multidisciplinary expertise of our team of scientists and engineers will
continue to advance our market and technological leadership. We conduct
extensive in-house training for our engineers in the technical areas, as well
focusing on ways to enhance their client service skills. At any given time,
about one quarter of our research and development engineers are operating in the
field, partnered with solution implementation engineers in a deliberate strategy
to provide direct feedback between technology development and client needs. Our
research and development expenses were approximately $1.9 million in 1998, $3.1
million in 1999, $6.4 million in 2000 and $2.7 million in the three months ended
March 31, 2001.
COMPETITION
The semiconductor industry is highly competitive and characterized by
rapidly changing design and process technologies, evolving standards, short
product life cycles and decreasing prices. While the market for silicon
infrastructure is in its infancy, it is rapidly evolving and we expect
competition to develop and continue to increase. We believe a comprehensive
solution to effectively close the design-to-silicon yield gap requires
integration of design and manufacturing processes. Currently, we are the only
provider of comprehensive commercial solutions for systematic IC yield and
performance enhancement. We face indirect competition from the internal groups
at IC companies that work on process integration, including groups at current
customers such as Toshiba or Conexant, and at prospective customers. Some
vendors to IC companies may also compete with us indirectly. For example,
Cadence, a prominent electronic design automation vendor, has offerings that
help enhance IC layout in ways that could result in improved yield. Providers of
yield management software aimed at maintaining and improving yield in mass
production, such as KLA-Tencor, although they can help us maintain yield gains
achieved in integration and ramp, may increasingly seek to broaden their
offering and compete with us. In addition to such indirect
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competition, other potential sources of competition include: yield-management
software vendors who could expand their offerings to include or increase design
and process capabilities; electronic design automation vendors, who could expand
their offerings to include process and manufacturing; and semiconductor process
equipment vendors, who could expand their offerings to include design and other
elements of process and manufacturing beyond their own equipment.
We believe that the principal factors affecting competition in our market
are:
- demonstrated results and reputation;
- strength of core technology;
- ability to implement solutions for new technology and product
generations;
- time to market; and
- strategic relationships.
Although we believe that our solutions compete favorably with respect to
these factors, our market is relatively new and is evolving rapidly. We may not
be able to maintain our competitive position against current and potential
competitors, especially those with significantly greater resources.
INTELLECTUAL PROPERTY
Our future success and competitive position are dependent upon our
continued ability to develop and protect proprietary software and other
technologies. We rely primarily on a combination of contractual provisions,
confidentiality procedures, trade secrets, and patent, copyright and trademark
laws to protect our proprietary technologies and prevent competitors from using
our technologies in their products. We have been issued one German patent and
have seven patent applications currently pending in the United States. We intend
to prepare additional patent applications for submission to the United States
Patent and Trademark Office. In the future, we may seek additional patent
protection when we feel it is necessary.
We license our products and technologies pursuant to non-exclusive license
agreements which impose restrictions on customer use. In addition, we seek to
avoid disclosure of our trade secrets, including, requiring employees, customers
and others with access to our proprietary information to execute confidentiality
agreements with us and restricting access to our source code. We also seek to
protect our software, documentation and other written materials under trade
secret and copyright laws. Despite this protection, unauthorized parties may
copy aspects of our current or future software and other technologies or obtain
and use information that we regard as proprietary.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. There are also numerous
patents in the semiconductor industry and new patents are being issued at a
rapid rate. It is also possible that third parties will claim that we have
infringed their patents and current or future products. Any claims, with or
without merit, could be time-consuming, result in costly litigation, cause
delays, or require us to enter into royalty or licensing agreements, any of
which could harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties. In the event an infringement claim
against us was successful and we could not obtain a license on acceptable terms
or license a substitute technology or redesign to avoid infringement, our
business would be harmed.
PDF Solutions(R), Circuit Surfer(R) and pdFab(R) are our registered
trademarks and Characterization Vehicle(TM), CV(TM), pdEx(TM) and Optissimo(TM)
are trademarks of PDF. All other brand names or trademarks appearing in this
prospectus are the property of their respective holders.
EMPLOYEES
As of March 31, 2001, we had 159 employees, including 60 in client service
teams, 68 in products and methods, 10 in sales and marketing and 21 in general
and administrative functions. One hundred nine of these employees are located in
San Jose, California, 15 are located in Texas and Virginia, 25 are located
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in Germany, 7 employees are located in Japan and 3 employees are located in
Italy. Of our 159 total employees, 129 are engineers, 113 of which have advanced
degrees including 67 with Ph.Ds.
None of our employees is represented by a labor union or is subject to a
collective bargaining agreement. We believe our relationship with our employees
is good.
LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings. In May 2001,
we were named as a defendant in a lawsuit claiming, among other things, that we
misappropriated trade secrets in connection with hiring an employee. We are
defending ourselves against the claims, which we believe to be without merit. We
do not believe that this litigation, or resolution of this litigation, will have
a material negative impact on our business.
FACILITIES
Our principal executive offices are located in San Jose, California where
we lease approximately 18,000 square feet under a lease that expires in October
2004 and have leased an additional 18,000 square feet under a lease that will
expire in May 2003. We lease 5,418 square feet in Dallas, Texas under a lease
that expires in July 2002. In addition, we lease 4,200 square feet in Munich,
Germany, 1,600 square feet in Tokyo, Japan and 1,665 square feet in DesEnzano,
Italy under leases that expire in June 2002, April 2002 and September 2006. We
believe that our current facilities in San Jose are adequate to meet our needs
through May 2003, at which time we will need to obtain additional space in the
San Jose area, which we expect to be able to obtain when necessary.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of our executive officers and directors as of March 31,
2001 are as follows:
NAME AGE POSITION(S)
---- --- -----------
John K. Kibarian, Ph.D. .................. 37 Chief Executive Officer, President and
Director
Thomas F. Cobourn, Ph.D. ................. 40 Vice President, Yield Analysis
David A. Joseph........................... 47 Vice President, Products and Methods
P. Steven Melman.......................... 46 Chief Financial Officer and Vice
President, Finance and Administration
Kimon Michaels, Ph.D. .................... 35 Vice President, Integration Practice and
Director
P.K. Mozumder, Ph.D. ..................... 38 Vice President, Integration Practice
W. Steven Rowe............................ 51 Vice President, Human Resources
David Tarpley............................. 55 Vice President, Worldwide Sales
B.J. Cassin............................... 67 Director
Donald L. Lucas........................... 71 Director
Lucio L. Lanza............................ 56 Director
John K. Kibarian, Ph.D., one of our founders, has served as President since
November 1991 and has served as our Chief Executive Officer since July 2000. Mr.
Kibarian has served as a director since December 1992. Mr. Kibarian received a
B.S. in Electrical Engineering, a M.S. E.C.E. and a Ph.D. E.C.E. from Carnegie
Mellon University.
Thomas F. Cobourn, Ph.D., one of our founders, has served in Vice
Presidential capacities since June 1992 including currently as Vice President,
Yield Analysis. Mr. Cobourn received a B.S., Computer Science and Engineering
from the University of Pennsylvania and a M.S. E.C.E. and Ph.D. E.C.E. from
Carnegie Mellon University.
David A. Joseph has served as Vice President, Products and Methods since
July 1999. He served as Vice President, Business Development from November 1998
through June 1999. From February 1978 to October 1998, Mr. Joseph served
KLA/Tencor, a semiconductor manufacturing company, in various positions,
including as Japan Business Manager, VP Customer Satisfaction and GM Yield
Analysis Software. Mr. Joseph received a B.S. in Mathematical Science from
Stanford University.
P. Steven Melman has served as Chief Financial Officer and Vice President,
Finance and Administration since July 1998. From April 1997 to June 1998, Mr.
Melman served as Vice President Finance and Administration with Animation
Science Corporation, an animation company. From April 1995 to April 1997, he
served as Vice President, Finance and Chief Financial Officer with Business
Resource Group, a facilities management and commercial furnishings company. Mr.
Melman received a B.S. in Business Administration from Boston University. Mr.
Melman is a Certified Public Accountant.
Kimon Michaels, Ph.D., one of our founders, has served in Vice Presidential
capacities since March 1993 including currently as Vice President, Integration
Practice, and as a director since November 1995. He also served as Chief
Financial Officer from November 1995 to July 1998. Mr. Michaels received a B.S.
in Electrical Engineering, a M.S. E.C.E. and a Ph.D. E.C.E. from Carnegie Mellon
University.
P.K. Mozumder, Ph.D. has served as Vice President, Integration Practice
since May 1998. From June 1994 to May 1998, Mr. Mozumder served as a Branch
Manager with Texas Instruments, Inc., a consumer electronics and semiconductor
company. Mr. Mozumder received a B. Tech in Electrical Engineering from the
Indian Institute of Technology in Bombay, India, and a M.S. E.C.E. and a Ph.D.
E.C.E. from Carnegie Mellon University.
W. Steven Rowe has served as Vice President, Human Resources since February
2000. From June 1995 to February 2000, Mr. Rowe served as Vice President, Human
Resources at Trident Microsystems, a
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multimedia semiconductor company. From May 1994 to June 1995, he served as Vice
President, Human Resources at OPTi Inc., a semiconductor company. Mr. Rowe
received a M.A. in Education Administration from San Jose State University, a
M.A. in Speech Pathology from Chico State University and a J.D. from Lincoln
University.
David Tarpley has served as Vice President, Worldwide Sales since November
1996. From 1995 through September of 1996, Mr. Tarpley served as Vice President,
International Sales for Anagram, Inc., an Electronic Design Automation company.
From 1993 to 1995, Mr. Tarpley served as Vice President, Worldwide Sales with
HLD, Inc., an electronic design automation company. Mr. Tarpley received a B.S.
in Business Administration from The University of California, Berkeley and an
M.B.A. from The California State University Fullerton.
B.J. Cassin has served as a director since November 1995. Mr. Cassin has
been a private venture capital investor since 1979. Previously, he co-founded
Xidex Corporation, a manufacturer of data storage media in 1969. Mr. Cassin is
chairman of the board of directors of Cerus Corporation, a medical device
company and a director of Symphonix Devices, Inc., a medical device company. Mr.
Cassin holds an A.B. in Economics from Holy Cross College.
Donald L. Lucas has served as a director since May 1999. He has been a
venture capitalist since 1960. He also serves as a director of Cadence Design
Systems, Inc., an electronic design automation company, Coulter Pharmaceutical,
Inc., a pharmaceutical company, Macromedia, Inc., a software company, Oracle
Corporation, an information management software company, Preview Systems, Inc.,
a infrastructure software company, Transcend Services, Inc., a medical services
company, and Tricord Systems, Inc., a storage system management software
company. Mr. Lucas holds a B.A. in Economics and an M.B.A. from Stanford
University.
Lucio L. Lanza has served as a director since November 1995. Mr. Lanza has
served as chairman of the board of Artisan Components, Inc., a semiconductor
intellectual property company since November 1997. From 1990 to December 2000,
Mr. Lanza served with U.S. Venture Partners, a venture capital firm, including
as a general partner from 1996 through December 2000.
BOARD COMPOSITION
Our bylaws currently provide for a board of directors consisting of five
members. Commencing upon completion of this offering, the board of directors
will be divided into three classes, each serving staggered three-year terms:
- Class I directors will include Mr. Lucas and Mr. Cassin, and their terms
will expire at the first annual meeting of stockholders following the
date of this prospectus;
- Class II directors will include Mr. Lanza and Mr. Michaels, and their
terms will expire at the second annual meeting of stockholders following
the date of this prospectus; and
- Class III directors will include Mr. Kibarian, whose term will expire at
the third annual meeting of stockholders following the date of this
prospectus.
As a result, only one class of directors will be elected at each annual meeting
of our stockholders, with the other classes continuing for the remainder of
their respective terms.
Each officer is elected by the board of directors and serves at its
discretion. Each of our officers and directors, other than nonemployee
directors, devotes his or her full time to our affairs. Our nonemployee
directors devote the amount of time to our affairs as is necessary to discharge
their duties. There are no family relationships among any of our directors or
officers.
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BOARD COMMITTEES
We have established an audit committee and a compensation committee.
Audit Committee
The audit committee reviews our internal accounting procedures and
considers and reports to the board of directors with respect to other auditing
and accounting matters, including the selection of our independent auditors, the
scope of annual audits, fees to be paid to our independent auditors and the
performance of our independent auditors. The audit committee currently consists
of Mr. Lucas, Mr. Lanza and Mr. Cassin.
Compensation Committee
The compensation committee reviews and recommends to the board of directors
the salaries, benefits and stock option grants of all employees, consultants,
directors and other individuals compensated by us. The compensation committee
also administers our stock option and other employee benefits plans. The
compensation committee currently consists of Mr. Cassin and Mr. Lanza.
DIRECTOR COMPENSATION
Our directors do not currently receive any compensation for serving on the
board of directors, although they are reimbursed for reasonable travel expenses
incurred in connection with attending board of directors and committee meetings.
In March 2000, we issued options to purchase 50,000 shares of common stock to
Mr. Lucas, at an exercise purchase price of $1.50 per share, one-quarter of the
shares vest on the 12 month anniversary of the vesting commencement date and
1/48 of the total number of shares subject to the option vest each month
thereafter, provided that Mr. Lucas remains one of our directors. After the
completion of this offering, any new directors will receive an initial option to
purchase 30,000 shares of common stock and all our directors will receive on an
annual basis options to purchase 7,500 shares of common stock. Please see
"Management -- Benefit Plans -- 2001 Stock Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee makes all compensation decisions. Our
compensation committee currently consists of Mr. Cassin and Mr. Lanza, neither
of whom has ever been one of our officers or employees. Prior to the formation
of the compensation committee in 1995, our board of directors made decisions
relating to compensation of our executive officers. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more of its executive officers serving as a member
of our board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation that
we paid during the fiscal years ended December 31, 1999 and 2000 to our Chief
Executive Officer and our four other most highly compensated officers who earned
more than $100,000 during those fiscal years. All option grants were made under
our 1997 Stock Plan. Amounts listed under "Other Annual Compensation" represent
the dollar value of commissions earned. The amounts listed under "All Other
Compensation" represent the dollar value of term life insurance paid by us on
behalf of the named executive officer during the fiscal
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years ended December 31, 1999 and 2000. There is no cash surrender value under
the life insurance policy.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- -------- ------- ------------ ------------ ------------
John K. Kibarian....................... 2000 $150,000 $42,000 -- 200,000 $371
Chief Executive Officer and President 1999 120,000 15,000 -- -- 321
David Tarpley.......................... 2000 100,240 -- $160,288 26,666 329
Vice President, Worldwide Sales 1999 100,240 -- 104,851 53,333 327
David A. Joseph........................ 2000 175,000 40,000 -- 53,333 371
Vice President, Products and Methods 1999 160,240 1,450 -- 33,333 327
P.K. Mozumder.......................... 2000 160,000 37,500 -- 40,000 371
Vice President, Integration Practice 1999 150,240 6,200 -- -- 327
P. Steven Melman....................... 2000 160,000 30,000 -- 33,333 371
Chief Financial Officer and Vice 1999 150,240 4,600 -- -- 327
President, Finance and
Administration
Option Grants in 2000
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our four most highly compensated
executive officers during the year ended December 31, 2000.
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERM
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION -----------------------------
NAME OPTIONS GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10%
---- --------------- -------------- ----------- ---------- ------------- -------------
John K. Kibarian..... 200,000 7.6% 3.00 6/30/10 $3,309,347 $5,624,982
David Tarpley........ 26,666 1.0% 3.00 6/30/10 441,235 749,979
David A. Joseph...... 53,333 2.0% 3.00 6/30/10 882,487 1,499,986
P. K. Mozumder....... 40,000 1.5% 3.00 6/30/10 661,869 1,124,996
P. Steven Melman..... 33,333 1.3% 3.00 6/30/10 551,552 937,488
We have never granted any stock appreciation rights. All option grants were
made under our 1997 stock plan. The exercise price per share was equal to the
fair market value of the common stock on the date of grant as determined by the
board of directors. Percentage of total options is based on an aggregate of
2,647,019 shares of common stock granted under the 1997 Stock Plan in the year
ended December 31, 2000.
The potential realizable value represents the hypothetical gain or option
spread that would exist for the options in this table if the assumed initial
public offering price of $12.00 for our common stock appreciates at assumed
annual rates of 5% and 10% for the ten year term of such options. These assumed
rates comply with the rules of the Securities and Exchange Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock.
Beginning on the vesting commencement date for each grant, the options
shown in this table vest monthly at a rate of 1/24 of the total number of shares
subject to the grant as long as the optionee remains an employee, consultant or
director. The vesting commencement dates for the named executive officers are as
follows: Mr. Kibarian -- June 30, 2000; Mr. Tarpley -- November 2, 2000; Mr.
Joseph -- May 20, 2003; Mr. Mozumder -- May 19, 2002; and Mr. Melman -- July 16,
2002.
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2000 Fiscal Year-End Option Values
The following table provides summary information with respect to our chief
executive officer and our four other most highly compensated executive officers
concerning:
- the shares of common stock acquired in 2000;
- the value realized upon exercise of stock options in 2000; and
- the number and value of unexercised options as of December 31, 2000.
The value realized was calculated by determining the difference between the fair
market value of underlying securities, which we have based on an assumed initial
public offering price of $12.00, and the exercise price.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2000 DECEMBER 31, 2000
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
John K. Kibarian............ 200,000 $1,800,000 -- -- -- --
David Tarpley............... 26,666 239,994 -- -- -- --
David A. Joseph............. 53,333 479,997 -- -- -- --
P. K. Mozumder.............. 40,000 360,000 -- -- -- --
P. Steven Melman............ 33,333 299,997 -- -- -- --
Each of these executives early exercised his stock options under our early
exercise program, which was terminated in October 2000, and executed a
restricted stock purchase agreement granting us the right to repurchase any
unvested shares at the exercise price upon the termination of his employment.
BENEFIT PLANS
1996 Stock Option Plan
Our 1996 Stock Option Plan, or the 1996 Plan, provides for the granting of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or the Code, and for the granting to
employees, directors and consultants of nonstatutory stock options. The 1996
Plan was approved by the board of directors in January of 1996 and by our
stockholders in February of 1996. The board of directors approved an amendment
to the 1996 Plan in August 1996 to allow grants to consultants, which amendment
did not require stockholder approval. Unless terminated sooner, the 1996 Plan
will terminate automatically in 2006. As of March 31, 2001, a total of 731,700
shares of common stock were reserved for issuance pursuant to the 1996 Plan of
which options to purchase 15,282 were outstanding and none were available for
grant.
The 1996 Plan may be administered by the board of directors or a committee
of the board of directors, which committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares, the exercisability thereof, and the form of consideration
payable upon exercise. In March 2000, the administrator amended the 1996 Plan
exercise practices to allow for the early exercise of unvested shares by all
optionees. In October 2000, the practice of allowing early exercise of unvested
shares was terminated. The board of directors has the authority to amend,
suspend or terminate the 1996 Plan, provided that the action may not adversely
affect any share of common stock previously issued and sold or any option
previously granted under the 1996 Plan.
Options granted under the 1996 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by the optionee. Options granted under the 1996 Plan generally must be
exercised within three months of the optionee's separation of service from PDF,
or
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within twelve months of the optionee's termination by death or disability, but
in no event later than the expiration of the option's ten year term. The
exercise price of all incentive stock options granted under the 1996 Plan must
be at least equal to the fair market value of the common stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of our outstanding capital stock, the
exercise price of any incentive or nonstatutory stock option granted must equal
at least 110% of the fair market value on the date of grant and the term of any
incentive stock option must not exceed five years. The exercise price of a
nonstatutory option granted to any other individual must equal at least 85% of
the fair market value on the date of grant. The term of all other options
granted under the 1996 Plan may not exceed ten years.
The 1996 Plan provides that in the event of a merger by us with or into
another corporation or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation unless the administrator decides that the optionees shall have the
right to exercise some or all of the unvested shares. If each outstanding option
is made exercisable in lieu of substitution or assumption as described in the
preceding sentence, the administrator shall notify the optionees that each
option shall be exercisable for a period of thirty days from the date of such
notice and that the option shall otherwise terminate upon the expiration of such
period.
Following adoption of the 1997 Stock Plan in September 1997 by the board of
directors, the 1996 Plan was effectively terminated and no additional grants
could be issued under the 1996 Plan.
1997 Stock Plan
Our 1997 Stock Plan, or the 1997 Plan, provides for the granting of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, directors
and consultants of nonstatutory stock options and stock purchase rights. The
1997 Plan was approved by the board of directors and stockholders in September
1997. The board of directors approved an amendment to the 1997 Plan in December
1999, and the stockholders approved this amendment in January of 2000. The board
of directors approved an amendment to the 1997 Plan in June 2000 and the
stockholders approved the amendment in July 2000. Unless terminated sooner, the
1997 Plan will terminate automatically in 2007. As of March 31, 2001, a total of
5,601,632 shares of common stock were reserved for issuance pursuant to the 1997
Plan of which options to purchase 354,407 shares were outstanding and 1,395,117
were available for grant.
The 1997 Plan may be administered by the board of directors or a committee
of the board of directors. The Administrator has the power to determine the
terms of the options granted, including the exercise price, the number of
shares, the exercisability thereof, and the form of consideration payable upon
exercise. The board of directors has the authority to amend, suspend or
terminate the 1997 Plan, provided that the action may not adversely affect any
share of common stock previously issued and sold or any option previously
granted under the 1997 Plan. On June 30, 2000, the board of directors formed a
Special Option Committee to serve as Administrator under the 1997 Plan for the
purposes of granting options to purchase up to 23,333 shares of common stock to
any new, non-executive employees. The Special Option Committee consists of Mr.
Kibarian and Mr. Melman.
Options and stock purchase rights granted under the 1997 Plan are not
generally transferable by the optionee, and each option and stock purchase right
is exercisable during the lifetime of the optionee only by the optionee. Options
granted under the 1997 Plan must generally be exercised within three months of
the optionee's separation of service from us, or within twelve months of the
optionee's termination by death or disability, but in no event later than the
expiration of the option's ten year term. Options granted under the 1997 Plan
generally may be exercised only when vested; however, certain options have been
or may be exercised immediately after the grant date, and to the extent the
shares subject to the options are not vested as of the date of exercise, we
retain a right to repurchase any shares that remain unvested at the time of the
optionee's termination of employment by paying an amount equal to the exercise
price times the number of unvested shares. Options granted under the 1997 Plan
generally vest at the rate of 1/4 of the total number of shares subject to the
options on the twelve month anniversary of the date of grant
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and 1/48 of the total number of shares subject to the options vest each month
thereafter. In the case of stock purchase rights, unless the administrator
determines otherwise, the Restricted Stock Purchase Agreement shall grant us a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service for any reason, including death or disability. The
purchase price for Shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The repurchase option
shall lapse at a rate determined by the administrator, which is generally equal
to 25% per year. The exercise price of all incentive stock options granted under
the 1997 Plan must be at least equal to the fair market value of the common
stock on the date of grant. The exercise price of all incentive stock options
granted under the 1997 Plan must be at least equal to the fair market value of
the common stock on the date of grant, and any nonstatutory option must have an
exercise price at least equal to 85% of the fair market value of the common
stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of our outstanding
capital stock, the exercise price of any incentive or nonstatutory stock option
or stock purchase rights granted must equal at least 110% of the fair market
value on the date of grant for options and 100% of the fair market value on the
date of grant in the case of stock purchase rights and the term of any incentive
stock option must not exceed five years. The term of all other options granted
under the 1997 Plan may not exceed ten years.
The 1997 Plan provides that in the event of a merger by us with or into
another corporation or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If each outstanding option is not assumed or substituted as
described in the preceding sentence, the administrator shall notify the
optionees that each option shall terminate upon the consummation of the merger
or sale of assets.
Effective as of the date of this prospectus, no new grants will be made
from the 1997 Plan.
2001 Stock Plan
Our 2001 Stock Plan, or the 2001 Plan, provides for the granting of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, directors
and consultants of nonstatutory stock options and stock purchase rights. The
2001 Plan was approved by the board of directors in June of 2001 and by the
stockholders in July of 2001. A total of 3,000,000 shares of common stock
(subject to equitable adjustment in the event of a recapitalization, merger,
spin-off or other similar event) has been reserved for issuance under the 2001
Plan, none of which have been issued as of the date of this offering. The number
of shares reserved for issuance under the Purchase Plan will be increased on the
first day of each of our fiscal years by the lesser of:
- 3,000,000 shares (subject to equitable adjustment in the event of a
recapitalization, merger, spin-off or other similar event);
- 5% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
- the number of shares determined by the board of directors.
The 2001 Plan may be administered by the board of directors or a committee
of the board of directors, which committee shall, in the case of options
intended to qualify as the "performance-based compensation" within the meaning
of Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The board of directors administers
the 2001 Plan with respect to awards granted to non-employee directors. Except
with respect to the automatic grant of options to our non-employee directors,
the administrator has the power to determine the terms of the options granted,
including the exercise price, the number of shares, the exercisability thereof,
and the form of consideration payable upon exercise. The board of directors has
the authority to amend, suspend or terminate the 2001 Plan, provided that the
action may not adversely affect any share of common stock previously issued and
sold or any option previously granted under the 2001 Plan.
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Options and stock purchase rights granted under the 2001 Plan are not
generally transferable by the optionee, and each option and stock purchase right
is generally exercisable during the lifetime of the optionee only by the
optionee. Options granted under the 2001 Plan must generally be exercised within
three months of the optionee's separation of service, or within twelve months of
the optionee's termination by death or disability, but in no event later than
the expiration of the option's ten year term. Options granted under the 2001
Plan generally may be exercised only when vested, however certain options have
been or may be exercised immediately after the grant date, and to the extent the
shares subject to the options are not vested as of the date of exercise, we
retain a right to repurchase any shares that remain unvested at the time of the
optionee's termination of employment by paying an amount equal to the exercise
price times the number of unvested shares. Options granted under the 2001 Plan
generally vest at the rate of 1/4 of the total number of shares subject to the
options on the twelve month anniversary of the date of grant and 1/48 of the
total number of shares subject to the options vest each month thereafter. In the
case of stock purchase rights, unless the administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service for any reason, including death or disability. The purchase price for
Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The repurchase option shall lapse at a rate
determined by the administrator which is generally equal to 25% per year. The
exercise price of all incentive stock options granted under the 2001 Plan must
be at least equal to the fair market value of the common stock on the date of
grant. The exercise price of nonstatutory stock options granted under the 2001
Plan is determined by the administrator. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option or
must equal at least 110% of the fair market value on the date of grant for
options and the term of any incentive stock option must not exceed five years.
The term of all other options granted under the 2001 Plan may not exceed ten
years.
The 2001 Plan provides for the automatic grant of nonstatutory stock
options to nonemployee directors. The director option component will not become
effective until completion of this offering. Each nonemployee director who first
becomes a board member after the date of this prospectus will be granted options
for 30,000 shares (subject to equitable adjustment in the event of a
reorganization merger, spin-off or other similar event). In addition, each
nonemployee director will be granted options for 7,500 shares (subject to
equitable adjustment in the event of a reorganization merger, spin-off or other
similar event) annually. These automatic grants shall vest in accordance with
the vesting schedule set forth above, however, in the event of a change in
control, these options shall become 100% vested.
Under the 2001 Plan, no individual shall receive options to purchase more
than 1,000,000 shares in any fiscal year (2,000,000 shares in the first year of
an individual's employment with us). No individual shall receive stock purchase
rights covering more than 500,000 shares in any fiscal year (1,000,000 shares in
the first year of an individual's employment with us). These limits are subject
to equitable adjustment in the event of a recapitalization, merger, spin-off or
other similar event.
The 2001 Plan provides that in the event of a merger by us with or into
another corporation or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation, unless the administrator decides in its sole discretion that
optionees have the right to exercise some or all of the stock in lieu of
substitution or assumption. If each outstanding option is not assumed or
substituted as described in the preceding sentence, the administrator shall
notify the optionees that each option shall be immediately exercisable and the
option will terminate upon expiration of such period.
2001 Employee Stock Purchase Plan
The 2001 Employee Stock Purchase Plan, or Purchase Plan, was adopted by the
board of directors in June of 2001 and approved by the stockholders in July
2001. A total of 300,000 shares of common stock (subject to equitable adjustment
in the event of a reorganization merger, spin-off or other similar event) has
been reserved for issuance under the Purchase Plan, none of which have been
issued as of the date of
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this offering. The number of shares reserved for issuance under the Purchase
Plan will be increased on the first day of each of our fiscal years by the least
of:
- 675,000 shares;
- 2% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
- the number of shares (subject to equitable adjustment in the event of a
reorganization, merger, spin off or other similar event) determined by
the board of directors.
The Purchase Plan becomes effective on the date of this prospectus. Unless
terminated earlier by the board of directors, the Purchase Plan shall terminate
on June 30, 2011.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of 24
months' duration, with new offering periods, other than the first offering
period, commencing on January 1 and July 1 of each year. Each offering period
will consist of four consecutive purchase periods of six months' duration, and
at the end of each six month period an automatic purchase will be made for
participants. The initial offering period is expected to commence on the date of
this offering and end on June 30, 2003; the initial purchase period is expected
to begin on the date of this offering. The Purchase Plan will be administered by
the board of directors or by a committee appointed by the board. Our employees
(including officers and employee directors), or of any of our majority-owned
subsidiaries designated by the board, are eligible to participate in the
Purchase Plan if we or our subsidiary employs them for at least 20 hours per
week and at least five months per year. Under the Purchase Plan, eligible
employees may purchase common stock through payroll deductions, which in any
event may not exceed 10% of an employee's compensation, at a price equal to the
lower of 85% of the fair market value of the common stock at the beginning of
each offering period or at the end of each purchase period. Employees may reduce
their participation in the Purchase Plan at any time during an offering period
but can only increase or end their participation at the next offering period and
participation ends automatically on termination of employment.
Under the Purchase Plan no employee shall be granted an option if
immediately after the grant the employee would own stock and/or hold outstanding
options to purchase stock equaling 5% or more of the total voting power or value
of all classes of our stock or its subsidiaries. In addition, no employee shall
be granted an option under the Purchase Plan if the option would permit the
employee to purchase stock under all our employee stock purchase plans and our
subsidiaries in an amount that exceeds $25,000 of fair market value for each
calendar year in which the option is outstanding at any time. If the fair market
value of the common stock on a purchase date is less than the fair market value
at the beginning of the offering period, each participant in the Purchase Plan
shall automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new twenty-four month offering period
beginning on the first business day following the purchase date.
The Purchase Plan provides that in the event of our merger or consolidation
with or into another corporation or a sale of all or substantially all of our
assets, each right to purchase stock under the Purchase Plan will be assumed or
an equivalent right will be substituted by the successor corporation unless the
board of directors shortens any ongoing offering period so that employees'
rights to purchase stock under the Purchase Plan are exercised prior to
consummation of the transaction. The board of directors has the power to amend
or terminate the Purchase Plan.
401(k) PLAN
We sponsor a 401(k) plan in which eligible employees may participate. The
401(k) plan is intended to qualify under Sections 401(a) and 401(k) of the Code.
Contributions to the 401(k) plan and income earned on such contributions are not
taxable to employees until withdrawn from the 401(k) plan. Subject to
restrictions imposed by the Code on highly compensated employees, employees
generally may defer up to 15% of their pre-tax earnings up to the statutorily
prescribed annual limit, which is $10,500 for the 2001 calendar year, and to
have the amount of such reduction contributed to the 401(k) plan. The 401(k)
plan permits, but does not require, additional matching contributions from us to
the 401(k) plan. Participants'
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salary reduction contributions are fully vested at all times. Each participant's
interest in their employer discretionary contributions and matching
contributions generally vest in accordance with a four-year graduated vesting
schedule. Participants may receive loans and hardship distributions while in
service and are eligible for a distribution from the 401(k) plan upon separation
from service with us. All contributions are tax deductible by us. The trustee
under the 401(k) plan, at the direction of participants, invests the assets of
the 401(k) plan in any of seven designated investment options. To date, we have
not made any matching contributions to the 401(k) plan. The 401(k) plan may be
amended or terminated by us at any time, and in our sole discretion.
CHANGE OF CONTROL ARRANGEMENTS
On July 9, 1998, we entered into a letter agreement with Mr. Melman to act
as our Vice President, Finance and Administration and Chief Financial Officer.
This letter agreement provides that in the event Mr. Melman is terminated
without cause any time after his one-year anniversary with us and there is no
change of control, Mr. Melman will receive six months accelerated vesting of
shares purchased pursuant to an option or restricted stock purchase agreement.
In the event of a change of control, Mr. Melman will receive 24 months
accelerated vesting, regardless of whether his employment is terminated. Change
of control is defined as an event whereby a party or group of parties, different
from those in control of PDF at the time of Mr. Melman's offer, attains a
majority voting right in PDF. Other than as described above, in general, our
employees are not subject to written employment agreements.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware general corporation law, we have included a
provision in our certificate of incorporation to eliminate the personal
liability of our officers and directors for monetary damages for breach or
alleged breach of their fiduciary duties as officers or directors, other than in
cases of fraud or other willful misconduct.
In addition, our bylaws provide that we are required to indemnify our
officers and directors even when indemnification would otherwise be
discretionary, and we are required to advance expenses to our officers and
directors as incurred in connection with proceedings against them for which they
may be indemnified. We have entered into indemnification agreements with our
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware general
corporation law. The indemnification agreements require us to indemnify our
officers and directors against liabilities that may arise by reason of their
status or service as officers and directors other than for liabilities arising
from willful misconduct of a culpable nature, to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified, and to obtain our directors' and officers' insurance if available
on reasonable terms. We expect to obtain directors' and officers' liability
insurance effective upon completion of this offering.
At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted. We believe that our
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
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RELATED-PARTY TRANSACTIONS
SALES OF PREFERRED STOCK SECURITIES
On December 4, 1995, we sold 5,833,331 shares of Series A preferred stock
at a price of $0.60 per share to a group of private investors that included the
directors, officers and 5% stockholders listed below. On August 4, 2000, we sold
350,872 shares of Series B preferred stock at a price of $14.25 per share to a
group of private investors that included the directors, officers and 5%
stockholders listed below. Upon completion of this offering, each outstanding
share of Series A preferred stock will automatically convert into one share of
common stock and each outstanding share of Series B preferred stock will
automatically convert into 1.425 shares of common stock, assuming an initial
public offering price that is less than $14.25 per share. Listed below are the
directors, executive officers, and stockholders who beneficially own 5% or more
of our securities who participated in these financings. The Value of Stock at
Initial Public Offering column includes the effect of additional shares to be
issued to Series B preferred stockholders upon conversion into common stock in
the amount of 37,278 shares to entities associated with U.S. Venture Partners
and 13,420 shares to Donald L. Lucas.
VALUE OF STOCK
AT INITIAL
SERIES A SERIES B AGGREGATE CASH PUBLIC
PREFERRED PREFERRED CONSIDERATION OFFERING PRICE
--------- --------- -------------- --------------
Entities associated with U.S. Venture
Partners.................................. 2,500,000 87,718 $2,750,000 $31,499,952
Telos Venture Partners, L.P................. 2,500,000 -- 1,500,000 30,000,000
B.J. Cassin................................. 541,666 -- 325,000 6,499,992
Donald L. Lucas............................. 125,000 31,578 524,986 2,039,976
U.S. Venture Partners IV, L.P., U.S.V.P. Entrepreneur Partners II, L.P.,
Second Ventures II, L.P. and 2180 Associates Fund are affiliated entities and
together are considered a greater than 5% stockholder. Lucio L. Lanza, one of
our directors, is a former partner of U.S. Venture Partners. Mr. Lanza disclaims
any beneficial ownership of the securities held by those entities, except to the
extent of his proportional interest in the entities. This table also includes
41,666 shares that are held in the name of Cassin Family Partners, A California
Limited Partnership of which Mr. Cassin is a General Partner and 500,000 shares
held in the name of The Cassin Family Trust U/D/T dtd 1/31/96. Mr. Lucas is the
trustee of the Richard M. Lucas Foundation which holds 125,000 shares of Series
A preferred stock. Mr. Lucas disclaims beneficial ownership of these shares
except for 25,765 shares which the foundation has agreed to assign to him. This
table also includes 21,052 shares of Series B preferred stock held in the name
of Donald L. Lucas Profit Sharing Trust and 10,526 shares held in the name of
Teton Capital Company, which are beneficially owned by Mr. Lucas. Mr. Lucas
disclaims beneficial ownership of all shares held in the name of Teton Capital
Company. The "Value of Stock at Initial Public Offering Price" column data is
calculated based on an assumed initial public offering price of $12.00 per
share.
LOANS TO, AND OTHER ARRANGEMENTS WITH, OFFICERS AND DIRECTORS
We have an early exercise provision under our 1996 Stock Option Plan and
1997 Stock Plan which allows our optionholders and holders of stock purchase
rights to purchase shares of stock underlying unvested options, subject to our
own repurchase right. In addition, we have an employee loan program which allows
employees to borrow the full exercise price of their options or stock purchase
rights from us by signing a full recourse promissory note bearing interest at
the applicable federal rate in the month of purchase. The following officers
have participated in the loan program:
- In connection with his purchase of 1,264,096 shares of common stock on
December 1, 1995, we loaned approximately $15,000 to Thomas Cobourn under
a four year, 5.83% promissory note. The term of this note was extended
for two years in 1999 at a rate of 5.93%. In connection with his purchase
of 26,666 shares of common stock on July 14, 2000, we loaned $80,000 to
Mr. Cobourn under a four year, 6.62% promissory note. These notes are
full recourse notes secured by pledges of
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the shares of common stock purchased. At March 31, 2001 his indebtedness
plus accrued interest totaled approximately $104,000.
- In connection with his purchase of 1,648,516 shares of common stock on
December 1, 1995, we loaned approximately $20,000 to Kimon Michaels under
a four year, 5.83% promissory note. The term of this note was extended
for two years in 1999 at a rate of 5.93%. In connection with his purchase
of 40,000 shares of common stock on July 14, 2000, we loaned $120,000 to
Mr. Michaels under a four year, 6.62% promissory note. These notes are
full recourse notes secured by pledges of the shares of common stock
purchased. At March 31, 2001 his indebtedness plus accrued interest
totaled approximately $153,000.
- In connection with his purchase of 200,000 shares of common stock on
August 25, 1998, we loaned approximately $30,000 to P. Steven Melman
under a four year, 5.47% promissory note. In connection with his purchase
of 33,333 shares of common stock on July 14, 2000, we loaned $100,000 to
Mr. Melman under a four year, 6.62% promissory note. These notes are full
recourse notes secured by pledges of the shares of common stock
purchased. At March 31, 2001 his indebtedness plus accrued interest
totaled approximately $139,000.
- In connection with his purchase of 166,666 shares of common stock on
October 5, 1998, we loaned $25,000 to P.K. Mozumder under a four year,
5.47% promissory note. In connection with his purchase of 40,000 shares
of common stock on July 13, 2000, we loaned $120,000 to Mr. Mozumder
under a four year, 6.62% promissory note. These notes are full recourse
notes secured by pledges of the shares of common stock purchased. At
March 31, 2001 his indebtedness plus accrued interest totaled
approximately $154,000.
- In connection with his purchase of 200,000 shares of common stock on
December 4, 1998 we loaned $75,000 to David A. Joseph under a four year,
4.46% promissory note. In connection with his purchase of 33,333 shares
on September 20, 1999 we loaned $12,500 to David Joseph under a four
year, 4.46% promissory note and in connection with his purchase of 53,333
shares of common stock on July 14, 2000, we loaned $160,000 to Mr. Joseph
under a four year, 6.62% promissory note. These notes are full recourse
notes secured by pledges of the shares of common stock purchased. At
March 31, 2001 his indebtedness plus accrued interest totaled
approximately $264,000.
- In connection with his purchase of 116,666 shares of common stock on
February 24, 2000, we loaned approximately $61,000 to W. Steven Rowe
under a four year, 6.69% promissory note. This note is a full recourse
note secured by a pledge of the shares of common stock purchased. At
March 31, 2001 his indebtedness plus accrued interest totaled
approximately $66,000.
- In connection with his purchase of 26,666 shares of common stock on July
13, 2000, we loaned $80,000 to David Tarpley under a four year, 6.62%
promissory note. This note is a full recourse note secured by a pledge of
the shares of common stock purchased. At March 31, 2001 his indebtedness
plus accrued interest totaled approximately $84,000.
- In connection with his purchase of 200,000 shares of common stock on July
14, 2000, we loaned $600,000 to John K. Kibarian under a four year, 6.62%
promissory note. This note is a full recourse note secured by pledges of
the shares of common stock purchased. At March 31, 2001 his indebtedness
plus accrued interest totaled approximately $629,000.
OTHER TRANSACTIONS
We have granted options to some of our officers and directors. Please see
"Management -- Executive Compensation," "Management -- Director Compensation"
and "Principal Stockholders."
We have entered into indemnification agreements with each of our executive
officers and directors. Please see "Management -- Limitation of Liability and
Indemnification Matters."
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Holders of preferred stock are entitled to registration rights with respect
to common stock issued or issuable upon conversion of the preferred stock.
Please see "Description of Capital Stock -- Registration Rights."
We believe that all related-party transactions described above were made on
terms no less favorable to us than could have been otherwise obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding beneficial
ownership of our common stock as of March 31, 2001 by:
- each person known by us to beneficially own more than 5% of the
outstanding common stock;
- each of our executive officers listed on the Summary Compensation Table
under "Management;"
- each of our directors; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to securities. All shares of common stock subject to options exercisable
within 60 days following March 31, 2001 are deemed to be outstanding and
beneficially owned by the persons holding those options for the purpose of
computing the number of shares beneficially owned and the percentage of
ownership of that person. They are not, however, deemed to be outstanding and
beneficially owned for the purpose of computing the percentage ownership of any
other person. Except as otherwise indicated the address for each person listed
as a director or officer is c/o PDF Solutions, Inc., 333 West San Carlos Street,
Suite 700, San Jose, CA 95110. Unless otherwise indicated in the footnotes, each
person or entity has sole voting and investment power, or shares such powers
with his or her spouse, with respect to the shares shown as beneficially owned.
Percentage of beneficial ownership prior to this offering is based on
17,206,611 common stock outstanding as of March 31, 2001, after giving effect to
the conversion of the outstanding preferred stock. Percentage of beneficial
ownership after this offering is based on 22,206,611 shares of common stock to
be outstanding after completion of this offering and completion of the
concurrent private placement, assuming no exercise of the underwriters'
over-allotment option.
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PERCENTAGE OF SHARES
OUTSTANDING
NUMBER OF ---------------------
SHARES PRIOR TO AFTER
BENEFICIALLY THIS THIS
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ -------- ---------
5% STOCKHOLDERS:
Funds affiliated with U.S. Venture Partners(1).............. 2,624,996 15.3% 11.8%
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Telos Venture Partners, L.P.(2)............................. 2,500,000 14.5 11.3
835 Page Mill Road
Palo Alto, CA 94303
EXECUTIVE OFFICERS AND DIRECTORS:
John K. Kibarian(3)......................................... 2,782,422 16.2 12.5
Lucio L. Lanza(4)........................................... 2,624,996 15.3 11.8
Kimon Michaels(5)........................................... 1,688,516 9.8 7.6
Thomas Cobourn(6)........................................... 1,290,762 7.5 5.8
B.J. Cassin(7).............................................. 541,666 3.1 2.4
3000 Sand Hill Road
Building 3, Suite 210
Menlo Park, CA 94025
David A. Joseph(8).......................................... 286,666 1.7 1.3
David Tarpley(9)............................................ 246,664 1.4 1.1
P. Steven Melman(10)........................................ 233,333 1.4 1.1
Donald L. Lucas(11)......................................... 219,998 1.3 *
3000 Sand Hill Road
Building 3, Suite 210
Menlo Park, CA 94025
P.K. Mozumder(12)........................................... 206,666 1.2 *
W. Steven Rowe(13).......................................... 116,666 * *
All executive officers and directors as a group (11 10,238,355 59.5 46.1
persons)(14)..............................................
- ---------------
* Less than 1%
(1) U.S. Venture Partners IV, L.P., U.S.V.P. Entrepreneur Partners II, L.P.,
Second Ventures II, L.P. and 2180 Associates Fund are affiliated entities
and together are considered a greater than 5% stockholder. The general
partner of each of these entities is Presidio Management Group IV, L.P., or
PMG. The general partners of PMG are William K. Bowes, Jr., Irwin Federman,
Steven M. Krausz and Philip M. Young. Each of these persons may be deemed
to share voting and dispositive control over the shares, but each disclaims
beneficial ownership therein except to the extent of their pecuniary
interest therein as a result of their respective interests in PMG. Lucio L.
Lanza, one of our directors, is a former partner of U.S. Venture Partners.
Mr. Lanza disclaims any beneficial ownership of the securities held by
those entities, except to the extent of his proportional interest in the
entities.
(2) Voting and dispositive power over these shares is held by Telos Management
LLC which is the general partner of Telos Venture Partners, L.P. The
managing members of Telos Management LLC are Bruce Bourbon, Athanasios
Kalekos and Paul Asel. Mr. Bourbon votes the shares after consultation with
the other two managing members.
(3) Includes 3,333 shares each issued in the names of Johanna Aznif
Chilingarian, as custodian for Ani Maritsa Chilingarian under the
Massachusetts Uniform Transfers to Minors Act and Johanna Aznif
Chilingarian, as custodian for Berj Krikor Chilingarian under the
Massachusetts Uniform Transfers to Minors Act, each of whom are family
members of Mr. Kibarian. Mr. Kibarian disclaims
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beneficial ownership of these shares. Includes 162,501 unvested shares
subject to our right to repurchase upon termination of employment.
(4) Includes 2,624,996 shares of stock held by U.S. Venture Partners IV, L.P.,
U.S.V.P. Entrepreneur Partners II, L.P., Second Ventures II, L.P. and 2180
Associates Fund are all affiliates of U.S. Venture Partners, of which Mr.
Lanza is a former partner. Mr. Lanza disclaims any beneficial ownership of
the securities held by those entities, except to the extent of his
proportional interest in the entities.
(5) Includes 3,333 shares each issued in the names of Lee W. Michaels, William
N. Michaels, and Christine S. Michaels, each of whom is an adult family
member of Mr. Michaels. Mr. Michaels disclaims beneficial ownership of
these shares. Includes 25,001 unvested shares subject to our right to
repurchase upon termination of employment.
(6) Includes 66,667 shares held in the name of the Thomas F. Coburn 2001
Grantor Retained Annuity Trust dated June 25, 2001 and 16,667 unvested
shares subject to our right to repurchase upon termination of employment.
(7) Includes 41,666 shares held in the name of Cassin Family Partners, A
California Limited Partnership and 500,000 shares held in the name of The
Cassin Family Trust U/D/T dtd 1/31/96.
(8) Includes 154,724 unvested shares subject to our right to repurchase upon
termination of employment.
(9) Includes 5,333 shares each issued in the names of Scott David Tarpley,
Andrew Neil Tarpley and Jeffrey John Tarpley, each of whom is an adult
child of Mr. Tarpley. Mr. Tarpley disclaims beneficial ownership of these
shares. Includes 22,222 unvested shares subject to our right to repurchase
upon termination of employment.
(10) Includes 100,001 unvested shares subject to our right to repurchase upon
termination of employment.
(11)Includes 125,000 shares held by the Richard M. Lucas Foundation of which Mr.
Lucas is a trustee. Mr. Lucas disclaims beneficial ownership of these shares
except as to 25,765 shares which the foundation has agreed to assign to him.
Also includes 21,052 shares held in the name of the Donald L. Lucas Profit
Sharing Trust and 10,526 shares held in the name of Teton Capital Company.
Also includes 37,500 unvested shares subject to our right to repurchase upon
termination of service. Mr. Lucas disclaims beneficial ownership of all
shares held in the name of Teton Capital Company.
(12) Includes 88,613 unvested shares subject to our right to repurchase upon
termination of employment.
(13) Includes 85,070 unvested shares subject to our right to repurchase upon
termination of employment.
(14) Includes an aggregate of 692,298 unvested shares which are subject to our
right to repurchase upon termination of employment or service.
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DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
75,000,000 shares of common stock, $0.00015 par value per share, and 5,000,000
shares of undesignated preferred stock, $0.00015 par value per share. All
currently outstanding shares of preferred stock will be converted into common
stock upon the closing of this offering.
COMMON STOCK
As of March 31, 2001, there were 17,206,611 shares of common stock
outstanding, as adjusted to give effect to the automatic conversion of all
outstanding shares of preferred stock upon completion of this offering, held of
record by approximately 155 stockholders. Options and rights to purchase 369,689
shares of common stock were also outstanding. Additionally, we currently intend
to grant options to purchase at least 650,000 shares to new and existing
employees prior to completion of this offering. There will be 22,206,611 shares
of common stock outstanding, assuming no exercise of the underwriter's
overallotment option or exercise of outstanding options under our stock option
plans after March 31, 2001, after giving effect to the sale of the shares in
this offering and completion of the concurrent private placement.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the prior distribution rights
of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 6,333,318 shares of common stock and automatically
retired, assuming an initial public offering price of $12.00 per share. Each
share of Series A preferred stock will be converted into one share of common
stock and each share of Series B preferred stock will be converted into 1.425
shares of common stock, assuming an initial public offering price that is less
than $14.25 per share. Thereafter, the board of directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock, $0.00015 par value, in one or more series. The board
of directors will also have the authority to designate the rights, preferences,
privileges and restrictions of each such series, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of us without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
some circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. We currently have no
plans to issue any shares of preferred stock.
WARRANTS
At March 31, 2001, there were no warrants outstanding to purchase our
common or preferred stock.
REGISTRATION RIGHTS
The holders of 12,416,644 shares of common stock (assuming the conversion
of all outstanding preferred stock upon completion of this offering and
completion of the concurrent private placement) or
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their transferees are entitled to rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the terms
of an agreement between us and the holders of these securities. Subject to
limitations in the agreement, the holders of at least 50% of these securities
then outstanding may require, on two occasions beginning six months after the
date of this prospectus, that we use our best efforts to register these
securities for public resale if Form S-3 is not available. If we register any of
our common stock either for our own account or for the account of other security
holders, the holders of registrable securities are entitled to include their
shares of common stock in that registration. A holder's right to include shares
in an underwritten registration is subject to the ability of the underwriters to
limit the number of shares included in this and other offerings, and in the case
of our initial public offering, the underwriters may preclude any participation
by holders of registrable securities. The holders of at least 50% of these
securities then outstanding may also require us, not more than once in any
twelve-month period, to register all or a portion of these securities on Form
S-3 when the use of that form becomes available to us, provided, among other
limitations, that the proposed aggregate selling price, net of any underwriters'
discounts or commissions, would exceed $1.0 million. Under the same agreement,
Applied Materials has one right to require us to register one half of its shares
on Form S-3 when the use of that form becomes available to us, provided that it
may only require us to do so if the proposed aggregate offering price, net of
underwriters' discounts or commissions would exceed $1.0 million. We will be
responsible for paying all registration expenses, and the holders selling their
shares will be responsible for paying all selling expenses.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
Provisions of Delaware law and our charter documents could make our
acquisition and the removal of incumbent officers and directors more difficult.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of us to negotiate with us first. We believe that the benefits
of increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweighs
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of us
without further action by the stockholders.
Our Amended and Restated Certificate of Incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. The Bylaws provide that
special meetings of stockholders can be called only by the board of directors,
the chairman of the board, if any, the president and holders of 50% of the votes
entitled to be cast at a meeting. Moreover, the business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting by the board of directors, the chairman of the board,
if any, the president or any such 50% holder. The bylaws set forth an advance
notice procedure with regard to the nomination, other than by or at the
direction of the board of directors, of candidates for election as directors and
with regard to business to be brought before a meeting of stockholders.
CONCURRENT PRIVATE PLACEMENT
On June 28, 2001, we entered into a common stock purchase agreement with
Applied Materials, Inc., or Applied Materials, under which we agreed to sell to
Applied Materials 500,000 shares of our common
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stock (or such lesser amount of shares having a maximum aggregate purchase price
of $10.0 million) in a private placement concurrent with and conditioned upon
the sale of shares in this offering. The price per share in the concurrent
private placement will be equal to the public offering price on the cover page
of the prospectus.
Transfer Restrictions. Applied Materials has agreed not to sell, transfer,
encumber or otherwise dispose of one half of the shares purchased in the
concurrent private placement in a public or private sale for a minimum period of
12 months following the closing of the offering. The remaining shares purchased
by Applied Materials in the concurrent private placement will be subject to
transfer restrictions for a period ranging from two to seven years following the
closing of the offering, depending upon the achievement of performance-based
milestones in connection with anticipated commercial agreements.
Registration Rights. We have granted Applied Materials registration rights
relating to one half of the shares of common stock they will purchase in the
concurrent private placement. See "-- Registration Rights."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Boston EquiServe.
The transfer agent's address is c/o Shareholder Services, 150 Royale Street,
Canton, MA 02021.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale, sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of the offering and the concurrent private placement, we
will have outstanding 22,206,611 shares of common stock, assuming no exercise of
outstanding options after March 31, 2001. Of these shares, the 5,000,000 shares
sold in the offering and the concurrent private placement, plus any shares
issued upon exercise of the underwriters' overallotment option, will be freely
tradable without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act, which
generally includes officers, directors or 10% stockholders.
The remaining 17,206,611 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of these shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
Our stockholders have entered into lock-up agreements generally providing
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
swap, hedge or other arrangement that transfers, in whole or part, any of the
economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until such agreements expire or are waived. Taking into
account the lock-up agreements, and assuming Credit Suisse First Boston
Corporation does not release stockholders from these agreements, the following
shares will be eligible for sale in the public market at the following times:
- Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market.
- Beginning 180 days after the effective date, approximately 15,715,207
shares will be eligible for sale pursuant to Rule 701 and pursuant to
Rule 144.
- An additional 1,491,404 shares will be eligible for sale on various dates
following the 181st day after the effective date of this offering,
subject to compliance with the provisions of Rule 144 or Rule 701 or
pursuant to a registration statement on Form S-8.
- A private placement of 500,000 shares (or such lesser amount of shares
having a maximum aggregate purchase price of $10.0 million) will occur
concurrent with the closing of this offering, one half of which will
become eligible for sale in the public market beginning one year from the
date of this prospectus pursuant to Rule 144. The remaining half of the
shares purchased in the concurrent private placement will become eligible
for sale as early as two years or as late as seven years following the
closing of this offering. See "-- Concurrent Private Placement -- Transfer
Restrictions."
Outstanding options and rights to purchase an additional 369,689 shares
plus at least an additional 650,000 options we currently intend to grant to new
and existing employees prior to completion of this
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offering will be exercisable and eligible for sale on various dates following
the 181st day after the effective date of this offering.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, or 180 days after the date of this
prospectus, of a person who has beneficially owned restricted securities for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of: (1) one percent of the number of
shares of common stock then outstanding, which will equal approximately 222,066
shares immediately after the offering; or (2) the average weekly trading volume
of the common stock during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
The holders of approximately 12,416,644 shares of our common stock or their
transferees are also entitled to rights with respect to registration of their
shares of common stock for offer or sale to the public. If the holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, the sales could have a material
adverse effect on the market price for our common stock.
As a result of the lock-up agreements, all of our employees holding common
stock or stock options may not sell shares acquired upon exercise until 180 days
after the effective date. Beginning 180 days after the effective date, any of
our employees, officers or directors or consultants who purchased shares
pursuant to a written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
such shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options
exercised under any of our benefit plans after the effectiveness of such
registration statement will also be freely tradable in the public market, except
that shares held by affiliates will still be subject to the volume limitation,
manner of sale, notice and public information requirements of Rule 144 unless
otherwise resalable under Rule 701. As of March 31, 2001, there were outstanding
stock purchase rights and options for the purchase of 369,689 shares, of which
43,852 shares were exercisable. No shares have been issued to date under our
2001 Employee Stock Purchase Plan and 2000 Stock Plan. See "Shares Eligible for
Future Sale," "Management -- Benefit Plans" and "Description of Capital Stock --
Registration Rights."
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2001, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Robertson Stephens, Inc. and Dain Rauscher Incorporated are acting as
representatives, the following respective numbers of shares of common stock:
NUMBER OF
SHARES
UNDERWRITER ---------
Credit Suisse First Boston Corporation......................
Robertson Stephens, Inc. ...................................
Dain Rauscher Incorporated..................................
---------
Total..................................................... 4,500,000
=========
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 675,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting discounts and commissions
paid
by us................................... $ $ $ $
Expenses payable by us.................. $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
In addition, Credit Suisse First Boston Corporation is acting as the
placement agent for the concurrent private placement with Applied Materials, and
will receive a customary fee for its services. See "Description of Capital
Stock -- Concurrent Private Placement."
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act of 1933 (the "Securities Act")
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus.
Our officers, directors and some of our other stockholders have agreed that
they will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities convertible
into or exchangeable or exercisable for any shares of our common stock, enter
into a
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transaction that would have the same effect, or enter into swap, hedge or other
arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other securities, in cash
or otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, or to enter into any such transaction, swap, hedge or
other arrangement, without, in each case, the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to 225,000 shares of the common stock for employees, directors and some
other persons associated with us, who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "PDFS."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters and will not necessarily reflect the market
price of the common stock following the offering. The principal factors that
will be considered in determining the public offering price will include:
- the information in this prospectus and otherwise available to the
underwriters;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market for the
common stock will develop and continue after the offering.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act").
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may
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close out any short position by either exercising their over-allotment
option and/or purchasing shares in the open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors
who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result, the price of our common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations. Credit Suisse First Boston Corporation may effect an
on-line distribution through its affiliate, CSFBdirect Inc., an on-line
broker/dealer, as a selling group member.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws, which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation,
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
for Shares acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
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TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Orrick, Herrington & Sutcliffe LLP, Menlo Park, California. Peter Cohn, a
partner of Orrick, Herrington & Sutcliffe LLP, is our Secretary. The
underwriters are represented by Wilson Sonsini Goodrich & Rosati, Palo Alto,
California. As of the completion of this offering, Orrick, Herrington &
Sutcliffe LLP and partners in that firm beneficially own an aggregate of 14,996
shares of our common stock.
EXPERTS
The Consolidated Financial Statements of PDF Solutions, Inc. as of December
31, 1999 and 2000 and for each of the three years in the period ended December
31, 2000, included in this prospectus and the related financial statement
schedule included elsewhere in the registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of Applied Integrated Systems and Software
Entwicklungs-, Produktions-und Vertriebs GmbH ("AISS") as of December 31, 1999
and for the year ended December 31, 1999, included in this prospectus have been
audited by Deloitte & Touche GmbH Wirtschaftsprufungsgesellschaft, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE TO FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus is materially complete, although additional
information is set forth in the Registration Statement and the exhibits and
schedules. For further information with respect to us and the common stock
offered hereby, reference is made to the Registration Statement and to the
exhibits and schedules. With respect to each such document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved. The Registration Statement and the
exhibits and schedules may be inspected without charge at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
all or any part of the Registration Statement may be obtained from the SEC's
offices upon payment of fees prescribed by the SEC. The SEC maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
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PDF SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
PDF SOLUTIONS, INC.:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000 and March 31, 2001 (Unaudited).................... F-3
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 2000 and
for the Three Months Ended March 31, 2000 and 2001
(Unaudited)............................................ F-4
Consolidated Statements of Shareholders' Deficiency for
each of the Three Years in the Period Ended December
31, 2000 and for the Three Months Ended March 31, 2001
(Unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the each of the
Three Years in the Period Ended December 31, 2000 and
for the Three Months Ended March 31, 2000 and 2001
(Unaudited)............................................ F-6
Notes to Consolidated Financial Statements................ F-7
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GmbH:
Independent Auditors' Report.............................. F-23
Balance Sheets as of December 31, 1999 and March 31, 2000
(Unaudited)............................................ F-24
Income Statements for the Year Ended December 31, 1999 and
for the Three Months Ended March 31, 1999 and 2000
(Unaudited)............................................ F-25
Statements of Shareholders' Equity (Deficiency) for the
Year Ended December 31, 1999 and for the Three Months
Ended March 31, 2000 (Unaudited)....................... F-26
Statements of Cash Flows for the Year Ended December 31,
1999 and for the Three Months Ended March 31, 1999 and
2000 (Unaudited)....................................... F-27
Notes to Financial Statements............................. F-28
PRO FORMA:
Unaudited Pro Forma Consolidated Statements of
Operations............................................. F-34
Unaudited Pro Forma Consolidated Statements of Operations
for the Year Ended December 31, 2000................... F-35
Notes to Unaudited Pro Forma Consolidated Statements of
Operations............................................. F-36
F-1
71
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of PDF Solutions, Inc.
We have audited the accompanying consolidated balance sheets of PDF
Solutions, Inc. and subsidiaries (collectively, the "Company") as of December
31, 1999 and 2000 and the related consolidated statements of operations,
shareholders' deficiency, and cash flows for each of the three years in the
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and 2000 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
January 19, 2001
(July 6, 2001 as to the third
paragraph of Note 12)
F-2
72
PDF SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, PRO FORMA
------------------------- MARCH 31, MARCH 31,
1999 2000 2001 2001
---------- ------------ ------------ ------------
(UNAUDITED)
(NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents................................. $1,932,923 $ 7,625,404 $ 6,866,274
Accounts receivable, net of allowances of $144,000 in
1999, and $192,000 in 2000 and 2001..................... 2,749,174 3,950,146 4,122,579
Prepaid expenses and other current assets................. 58,714 576,250 586,251
---------- ------------ ------------
Total current assets.................................... 4,740,811 12,151,800 11,575,104
Property and equipment, net................................. 822,026 1,561,402 1,786,729
Intangible assets, net...................................... -- 1,669,935 1,544,689
Other assets................................................ 81,498 131,332 127,385
---------- ------------ ------------
Total assets............................................ $5,644,335 $ 15,514,469 $ 15,033,907
========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 730,232 $ 1,143,080 $ 1,247,302
Accrued compensation and related benefits................. 1,152,956 2,362,443 1,691,064
Other accrued liabilities................................. 213,690 984,645 792,825
Taxes payable............................................. 130,000 15,397 27,467
Deferred revenues......................................... 345,992 1,870,027 2,222,589
Billings in excess of recognized revenue.................. -- 1,052,513 1,193,700
Notes payable............................................. -- 995,000 995,000
Current portion of long-term debt......................... 15,379 21,491 28,047
---------- ------------ ------------
Total current liabilities............................... 2,588,249 8,444,596 8,197,994
---------- ------------ ------------
Long-term debt.............................................. 71,616 55,947 43,249
Deferred tax liability...................................... -- 532,263 493,796
Deferred rent............................................... 50,821 56,690
Series A convertible preferred stock, $0.00015 par value,
5,833,333 shares authorized; shares issued and
outstanding: 5,833,331 in 1999, 2000 and 2001; none pro
forma (liquidation preference of $3,500,000).............. 3,496,558 3,496,558 3,496,558 --
Series B convertible preferred stock, $0.00015 par value,
366,667 shares authorized; issued and outstanding: 350,872
in 2000 and 2001; none pro forma (liquidation preference
of $5,000,000)............................................ -- 4,960,000 4,960,000 --
Commitments and contingencies (Notes 4 and 13)
Shareholders' equity (deficiency):
Common stock, $0.00015 par value, 33,333,333 shares
authorized; shares issued and outstanding 7,326,539 in
1999, 10,903,174 in 2000, 10,873,293 in 2001; 17,206,611
pro forma............................................... 1,099 1,635 1,631 $ 2,559
Additional paid-in capital................................ 537,199 25,386,369 25,088,609 35,163,519
Deferred stock-based compensation......................... (43,406) (11,882,070) (9,087,360) (9,087,360)
Notes receivable from shareholders........................ (225,261) (5,645,632) (5,577,757) (5,577,757)
Accumulated deficit....................................... (781,719) (9,878,447) (12,622,005) (14,241,285)
Cumulative other comprehensive loss....................... -- (7,571) (17,498) (17,498)
---------- ------------ ------------ ------------
Total shareholders' equity (deficiency)................. (512,088) (2,025,716) (2,214,380) $ 6,242,178
========== ============ ============ ============
Total liabilities and shareholders' equity
(deficiency).......................................... $5,644,335 $ 15,514,469 $ 15,033,907
========== ============ ============
See notes to consolidated financial statements.
F-3
73
PDF SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1998 1999 2000 2000 2001
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
Revenue:
Design-to-silicon yield
solutions...................... $6,227,249 $10,566,597 $15,538,325 $ 2,193,674 $ 5,752,838
Gain share....................... -- 1,257,000 4,597,000 1,500,000 1,781,134
---------- ----------- ----------- ----------- -----------
Total revenue.................. 6,227,249 11,823,597 20,135,325 3,693,674 7,533,972
---------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of design-to-silicon yield
solutions...................... 1,532,620 4,090,649 6,915,001 1,251,982 2,555,935
Research and development......... 1,863,808 3,086,825 6,418,173 946,206 2,657,071
Selling, general and
administrative................. 2,959,504 4,294,521 7,332,857 1,445,587 2,454,384
Offering costs................... -- -- 1,257,617 -- --
Stock-based compensation
amortization*.................. 61,317 68,282 7,292,300 458,358 2,556,866
---------- ----------- ----------- ----------- -----------
Total costs and expenses....... 6,417,249 11,540,277 29,215,948 4,102,133 10,224,256
---------- ----------- ----------- ----------- -----------
Income (loss) from operations...... (190,000) 283,320 (9,080,623) (408,459) (2,690,284)
Interest and other income.......... 127,598 105,021 346,895 17,367 131,906
---------- ----------- ----------- ----------- -----------
Income (loss) before taxes......... (62,402) 388,341 (8,733,728) (391,092) (2,558,378)
Tax provision...................... 341,492 533,087 363,000 107,000 185,180
---------- ----------- ----------- ----------- -----------
Net loss........................... $ (403,894) $ (144,746) $(9,096,728) $ (498,092) $(2,743,558)
========== =========== =========== =========== ===========
Net loss per share -- basic and
diluted (Note 1)................. $ (0.08) $ (0.02) $ (1.24) $ (0.07) $ (0.34)
========== =========== =========== =========== ===========
Shares used in computing basic and
diluted net loss per share (Note
1)............................... 4,943,906 6,085,562 7,356,221 6,796,536 8,064,375
========== =========== =========== =========== ===========
Unaudited pro forma net loss per
share -- basic and diluted (Note
1)............................... $ (0.68) $ (0.19)
=========== ===========
Shares used in computing unaudited
pro forma basic and diluted net
loss per share (Note 1).......... 13,393,649 14,397,693
=========== ===========
*Stock-based compensation
amortization:
Cost of design-to-silicon yield
solutions...................... $ 18,395 $ 20,485 $ 1,714,866 $ 42,254 $ 718,641
Research and development......... 42,922 47,797 4,015,978 355,453 1,181,109
Selling, general and
administrative................. -- -- 1,561,456 60,651 657,116
---------- ----------- ----------- ----------- -----------
$ 61,317 $ 68,282 $ 7,292,300 $ 458,358 $ 2,556,866
========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-4
74
PDF SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE ACCUMULATED
------------------- PAID-IN STOCK FROM EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS (DEFICIT)
---------- ------ ----------- ------------ ------------ ------------
Balances, January 1, 1998........... 5,833,331 $ 875 $ 153,433 $ (36,617) $ (39,011) $ (233,079)
Exercise of options................. 1,267,302 190 215,093 (198,750)
Compensatory stock arrangements for
non-employees, primarily
remeasurement..................... 99,674 (99,674)
Amortization of non-employee stock-
based compensation................ 61,317
Net loss............................ (403,894)
---------- ------ ----------- ------------ ----------- ------------
Balances, December 31, 1998......... 7,100,633 1,065 468,200 (74,974) (237,761) (636,973)
Collection of notes receivable from
shareholders...................... 6,772
Repurchase of common stock through
cancellation of note receivable... (121,520) (18) (18,210) 18,228
Exercise of options................. 347,426 52 50,495 (12,500)
Compensatory stock arrangements for
non-employees, primarily
remeasurement..................... 36,714 (36,714)
Amortization of non-employee stock-
based compensation................ 68,282
Net loss............................ (144,746)
---------- ------ ----------- ------------ ----------- ------------
Balances, December 31, 1999......... 7,326,539 1,099 537,199 (43,406) (225,261) (781,719)
Collection of notes receivable from
shareholders...................... 8,999
Exercise of options................. 3,440,070 516 5,757,226 (5,478,370)
Repurchase of common stock through
cancellation of note receivable... (30,093) (5) (48,995) 49,000
Compensatory stock arrangements for
non-employees..................... 376,544 (376,544)
Remeasurement of compensatory stock
arrangements for non-employees.... 538,753 (538,753)
Cancellation of unvested
non-employee options.............. (301,690) 301,690
Compensatory stock arrangements for
employees......................... 18,662,357 (18,662,357)
Reversal of employee stock-based
compensation for cancelled
shares............................ (145,000) 145,000
Issuance of common stock upon
exercise of warrants.............. 166,666 25 9,975
Amortization of employee stock-based
compensation...................... 6,641,620
Amortization of non-employee stock-
based compensation................ 650,680
Net loss............................ (9,096,728)
Cumulative translation adjustment...
Comprehensive loss..................
---------- ------ ----------- ------------ ----------- ------------
Balances, December 31, 2000......... 10,903,174 1,635 25,386,369 (11,882,070) (5,645,632) (9,878,447)
Collection of notes receivable from
shareholders*..................... 7,875
Repurchase of common stock through
cancellation of notes
receivable*....................... (31,268) (4) (297,840) 237,844 60,000
Exercise of options*................ 1,387 80
Amortization of employee stock-based
compensation*..................... 2,552,743
Amortization of non-employee stock-
based compensation*............... 4,123
Net loss*........................... (2,743,558)
Cumulative translation
adjustment*.......................
Comprehensive loss*.................
---------- ------ ----------- ------------ ----------- ------------
Balances, March 31, 2001*........... 10,873,293 $1,631 $25,088,609 $ (9,087,360) $(5,577,757) $(12,622,005)
========== ====== =========== ============ =========== ============
CUMULATIVE
OTHER
COMPREHENSIVE
LOSS TOTAL
------------- -----------
Balances, January 1, 1998........... $ -- $ (154,399)
Exercise of options................. 16,533
Compensatory stock arrangements for
non-employees, primarily
remeasurement..................... --
Amortization of non-employee stock-
based compensation................ 61,317
Net loss............................ (403,894)
-------- -----------
Balances, December 31, 1998......... -- (480,443)
Collection of notes receivable from
shareholders...................... 6,772
Repurchase of common stock through
cancellation of note receivable... --
Exercise of options................. 38,047
Compensatory stock arrangements for
non-employees, primarily
remeasurement..................... --
Amortization of non-employee stock-
based compensation................ 68,282
Net loss............................ (144,746)
-------- -----------
Balances, December 31, 1999......... -- (512,088)
Collection of notes receivable from
shareholders...................... 8,999
Exercise of options................. 279,372
Repurchase of common stock through
cancellation of note receivable... --
Compensatory stock arrangements for
non-employees..................... --
Remeasurement of compensatory stock
arrangements for non-employees.... --
Cancellation of unvested
non-employee options.............. --
Compensatory stock arrangements for
employees......................... --
Reversal of employee stock-based
compensation for cancelled
shares............................ --
Issuance of common stock upon
exercise of warrants.............. 10,000
Amortization of employee stock-based
compensation...................... 6,641,620
Amortization of non-employee stock-
based compensation................ 650,680
Net loss............................
Cumulative translation adjustment... (7,571)
Comprehensive loss.................. (9,104,299)
-------- -----------
Balances, December 31, 2000......... (7,571) (2,025,716)
Collection of notes receivable from
shareholders*..................... 7,875
Repurchase of common stock through
cancellation of notes
receivable*....................... --
Exercise of options*................ 80
Amortization of employee stock-based
compensation*..................... 2,552,743
Amortization of non-employee stock-
based compensation*............... 4,123
Net loss*...........................
Cumulative translation
adjustment*....................... (9,927)
Comprehensive loss*................. (2,753,485)
-------- -----------
Balances, March 31, 2001*........... $(17,498) $(2,214,380)
======== ===========
- ---------------
* Unaudited
See notes to consolidated financial statements.
F-5
75
PDF SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1998 1999 2000 2000 2001
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
Operating activities:
Net loss........................................ $ (403,894) $ (144,746) $(9,096,728) $ (498,092) $(2,743,558)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 240,953 303,546 833,499 98,234 309,744
Stock-based compensation amortization......... 61,317 68,282 7,292,300 458,358 2,556,866
Common stock issued for services.............. 625 -- -- -- --
Loss (gain) on the sale of property and
equipment................................... 16,902 (1,157) 15,038 -- 2,306
Deferred revenues............................. (987,969) (132,058) 1,514,154 663,260 352,562
Changes in assets and liabilities, net of
effect of acquisition:
Accounts receivable......................... 578,254 (699,014) (815,388) (600,214) (172,433)
Prepaid expenses and other assets........... (93,295) (6,705) (540,157) (140,744) (6,054)
Accounts payable............................ 502,020 (9,263) 372,727 222,376 104,222
Accrued compensation and related
benefits................................. 70,121 777,074 1,209,487 (564,495) (671,379)
Billings in excess of recognized revenue.... 2,597 (2,597) 1,052,513 -- 141,187
Other accrued liabilities and taxes
payable.................................. 224,625 119,065 62,879 (78,909) (212,348)
---------- ---------- ----------- ---------- -----------
Net cash provided by (used in)
operating activities................... 212,256 272,427 1,900,324 (440,226) (338,885)
---------- ---------- ----------- ---------- -----------
Investing activities:
Purchases of property and equipment............. (280,758) (549,615) (1,203,330) (198,746) (412,131)
Proceeds from sale of equipment................. -- 12,926 -- -- --
Acquisition of AISS, net of cash acquired....... -- -- (225,330) -- --
---------- ---------- ----------- ---------- -----------
Net cash used in investing activities.... (280,758) (536,689) (1,428,660) (198,746) (412,131)
---------- ---------- ----------- ---------- -----------
Financing activities:
Exercise of stock options and warrants.......... 15,908 38,047 289,372 30,770 80
Proceeds from the sale of preferred stock....... -- -- 4,960,000 -- --
Collection of notes receivable from
shareholders.................................. -- 6,772 8,999 -- 7,875
Principal payments on long-term debt............ -- (3,018) (29,983) (15,713) (6,142)
---------- ---------- ----------- ---------- -----------
Net cash provided by financing
activities............................. 15,908 41,801 5,228,388 15,057 1,813
---------- ---------- ----------- ---------- -----------
Effect of exchange rate changes on cash........... -- -- (7,571) -- (9,927)
---------- ---------- ----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... (52,594) (222,461) 5,692,481 (623,915) (759,130)
Cash and cash equivalents, beginning of period.... 2,207,978 2,155,384 1,932,923 1,932,924 7,625,404
---------- ---------- ----------- ---------- -----------
Cash and cash equivalents, end of period.......... $2,155,384 $1,932,923 $ 7,625,404 $1,309,009 $ 6,866,274
========== ========== =========== ========== ===========
Noncash investing and financing activities:
Common stock issued for notes receivable........ $ 198,750 $ 12,500 $ 5,478,370 $ -- $ --
========== ========== =========== ========== ===========
Property acquired under capital lease........... $ -- $ 90,013 $ -- $ -- $ --
========== ========== =========== ========== ===========
Notes payable issued to acquire AISS............ $ -- $ -- $ 995,000 $ -- $ --
========== ========== =========== ========== ===========
Supplemental disclosure of cash flow
information --
Cash paid during the year for:
Taxes......................................... $ 341,492 $ 403,087 $ 582,000 $ 100,000 $ 100,000
========== ========== =========== ========== ===========
Interest...................................... $ -- $ 677 $ 5,137 $ 1,099 $ 1,211
========== ========== =========== ========== ===========
See notes to consolidated financial statements.
F-6
76
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
PDF Solutions, Inc. (the "Company"), a California corporation, was
incorporated in November 1992 and provides comprehensive infrastructure
technologies and services to improve yield and optimize performance of
integrated circuits. The Company's approach includes manufacturing simulation
and analysis, combined with yield improvement methodologies to increase product
yield and performance.
Basis of Presentation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries after the elimination
of all significant intercompany balances and transactions.
Significant Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. A significant
portion of the Company's revenues require estimates in regards to total costs
which may be incurred and revenues earned. Actual results could differ from
these estimates.
Certain Significant Risks and Uncertainties -- The Company operates in the
dynamic semiconductor and software industry, and accordingly, can be affected by
a variety of factors. For example, management of the Company believes that
changes in any of the following areas could have a significant negative effect
on the Company in terms of its future financial position, results of operations
and cash flows: ability to obtain additional financing; regulatory changes;
fundamental changes in the technology underlying software technologies; market
acceptance of the Company's solutions; development of sales channels; litigation
or other claims against the Company; the hiring, training and retention of key
employees; successful and timely completion of development efforts; and new
product introductions by competitors. Due to protracted delays in the Company's
planned initial public offering, the Company expensed offering costs of
$1,257,617 in the quarter ended December 31, 2000.
Concentration of Credit Risk -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company maintains its cash and
cash equivalents with high credit quality financial institutions. The Company
primarily sells its products to companies in Japan and North America. The
Company does not require collateral or other security to support accounts
receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.
Cash Equivalents -- The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months or less to be
cash equivalents.
Accounts Receivable -- Accounts receivable include amounts that are
unbilled at the end of the period. Unbilled accounts receivable are determined
on an individual contract basis and were approximately $0, $365,000 and $194,000
at December 31, 1999 and 2000 and March 31, 2001, respectively.
Property and equipment -- Property and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the related asset. The estimated useful lives are as follows:
Computer and equipment........................... 3 years
Software......................................... 3 years
Furniture and fixtures........................... 5 - 7 years
F-7
77
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
Intangible Assets -- Intangible assets are related to the business
acquisition discussed in Note 2. Amortization is recorded on a straight-line
basis over a period of four years.
Impairment of Long-Lived Assets -- In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
evaluates its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount, an impairment loss would be measured based on the discounted
cash flows compared to the carrying amount. No impairment charge has been
recorded in any of the periods presented.
Notes Receivable from Shareholders -- The notes receivable from
shareholders are full recourse notes issued in exchange for common stock. Notes
outstanding at December 31, 2000 and March 31, 2001, bear interest at 4.46% to
6.69% per annum. The notes are generally payable over periods of two to four
years.
Revenue Recognition -- The Company derives revenue from two sources:
design-to-silicon yield solutions and gain share. The Company recognizes
revenues in accordance with the provisions of American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, Software Revenue
Recognition, as amended, and SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.
Design-to-Silicon Yield Solutions -- Design-to-silicon yield solutions
revenue is derived from solution implementations, software licenses and
software support and maintenance. Revenue recognition for each element of
design-to-silicon yield solutions is summarized as follows:
Solution Implementations -- Revenue under contracts for solution
implementation services is recognized as the services are performed
using the cost-to-cost percentage of completion method of contract
accounting. Losses on solution implementation contracts are recognized
when determined. Revisions in profit estimates are reflected in the
period in which the conditions that require the revision become known
and are estimable.
Software Licenses -- The Company has entered into a few multi-year
time based licenses, generally three years. Revenue under arrangements
which require the Company to provide support and maintenance over a
period of time, where vendor-specific objective evidence of fair value
does not exist to allocate a portion of the total fee to the undelivered
elements, are recognized ratably over the term of the agreement. No
revenue under arrangements with extended payment terms has been
recognized in excess of amounts due.
Other license fees are recognized on the residual value method: (i)
when an agreement has been signed, the software has been delivered, the
license fee is fixed or determinable and collection of the fee is
probable or (ii) as a component of a related solution implementation
contract.
Software Support and Maintenance -- Amounts allocated to
undelivered support and maintenance are based on vendor specific
objective evidence, generally negotiated renewal rates. Revenue from
allocated support and maintenance and renewals is recognized ratably
over the term of the support and maintenance contract, generally one
year.
Gain Share -- Gain share revenue represents profit sharing and
performance incentives earned based upon its customer reaching certain
defined operational levels. Upon achieving such operational levels, the
Company receives either a fixed fee and/or royalties based on the units
sold by the
F-8
78
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
customer. Due to the uncertainties surrounding attainment of such
operational levels, the Company recognizes gain share revenue (to the
extent of completion of the related solution implementation contract) upon
receipt of performance reports or other related information from the
customer supporting the determination of amounts and probability of
collection.
Software Development Costs -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Computer Software to be Sold,
Leased or Otherwise Marketed. Because the Company believes its current process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
Research and Development -- Research and development expenses are charged
to operations as incurred.
Stock-Based Compensation -- The Company accounts for stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to Employees, and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"). Deferred compensation recognized under APB
No. 25 is amortized to expense using the graded vesting method. The Company
accounts for stock options and warrants issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18
under the fair value based method.
Net Loss per Share -- Basic net loss per share excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted net
loss per share was the same as basic net loss per share for all periods
presented since the effect of any potentially dilutive securities is excluded as
they are anti-dilutive because of the Company's net losses.
Unaudited Pro Forma Net Loss per Share -- Pro forma basic and diluted net
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding for the period (excluding shares subject to
repurchase) and the weighted average number of common shares resulting from the
assumed conversion, from their respective issuance dates, of outstanding shares
of Series A and Series B convertible preferred stock which will occur upon the
closing of the planned initial public offering. The computation does not include
the effect of a one-time dividend charge expected to be recorded upon conversion
of the Series B convertible preferred stock (see Note 12).
Unaudited Pro Forma Information -- Upon the closing of the planned initial
public offering, the outstanding shares of Series A and Series B convertible
preferred stock will convert into an aggregate of 6,333,318 shares of common
stock. The pro forma balance sheet presents the Company's balance sheet as if
this had occurred at March 31, 2001 (see Note 12).
Unaudited Interim Financial Information -- The interim financial
information as of March 31, 2001 and for the three months ended March 31, 2000
and 2001 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited financial
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the three months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2001.
F-9
79
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
Foreign Currency Translation -- The functional currency of the Company's
foreign subsidiaries is the local currency for the respective subsidiary. The
assets and liabilities are translated at the period-end exchange rate, and
statements of operations are translated at the average exchange rate during the
year. Gains and losses resulting from foreign currency translations are included
as a component of other comprehensive income.
Comprehensive Income -- Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources. For 1998 and 1999, comprehensive loss was equal to
net loss. Comprehensive loss for the year ended December 31, 2000 and the three
months ended March 31, 2001 is presented within the statement of shareholders'
deficiency and is comprised entirely of cumulative translation adjustment.
Recently Issued Accounting Standards -- In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The Company adopted SFAS No. 133, as amended, on
January 1, 2001. The adoption of this statement did not have an effect on the
Company's financial position, results of operations or cash flows as the Company
had no stand-alone or embedded derivatives at December 31, 2000 and had not
historically entered into any derivative transactions to hedge currency or other
exposures.
As a matter of policy, the Company does not currently enter into
transactions involving derivative financial instruments. In the event the
Company does enter into such transactions in the future, such items will be
accounted for in accordance with SFAS No. 133, in which case the Company will
formally document all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
such hedge transactions.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The Company has adopted the
applicable disclosure requirements of SFAS No. 140 in its consolidated financial
statements as of December 31, 2000. The Company is currently evaluating the
impact of adopting the remaining provisions of SFAS No. 140 which will be
effective for transactions entered into after March 31, 2001.
2. BUSINESS COMBINATION
On April 27, 2000, the Company acquired all of the outstanding common stock
of AISS, a German company, for $1.25 million, consisting of $995,000 in notes
payable and $255,000 in cash. AISS develops software and provides yield
management services to the semiconductor industry. The note bears interest at 7%
per annum payable quarterly with principal due on April 27, 2001.
The acquisition was accounted for using the purchase method and the
operating results of AISS have been included in the consolidated statements of
operations since the date of acquisition. The excess purchase price (including
costs of acquisition) over the fair value of the tangible assets and liabilities
F-10
80
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
assumed, totaled $2,007,994 and represents acquired technology, employee
workforce and goodwill which is being amortized on a straight line basis over a
period of four years. Amortization expense totaled $338,059 and $125,246 for the
year ended December 31, 2000 and the three months ended March 31, 2001,
respectively.
The fair value of the assets acquired and liabilities assumed were as
follows (in thousands):
Cash................................................ $ 30
Accounts receivable................................. 386
Other assets........................................ 27
Property and equipment.............................. 46
Acquired technology................................. 662
Employee workforce.................................. 540
Goodwill............................................ 807
Accrued acquisition cost............................ (113)
Less liabilities assumed............................ (509)
Deferred tax liability.............................. (626)
------
$1,250
======
Had the acquisition taken place at the beginning of fiscal 1999 and 2000
respectively, the unaudited pro forma results of operations would have been as
follows for the years ended December 31, 1999 and 2000 (in thousands, except per
share data):
1999 2000
------- -----------
(UNAUDITED)
Net revenues........................... $12,836 $20,457
Net loss............................... (386) (9,131)
Net loss per share -- basic and
diluted.............................. (0.06) (1.24)
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill, interest charges
on the note issued in connection with the acquisition, and the elimination of
sales between the Company and AISS.
The pro forma amounts are based on certain assumptions and estimates and do
not necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of results
of future combined operations.
F-11
81
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
--------------------------- MARCH 31,
1999 2000 2001
------------ ----------- -----------
(UNAUDITED)
Computer equipment........................ $ 884,276 $ 1,810,385 $ 2,039,465
Software.................................. 355,687 506,838 737,192
Furniture, fixtures, and equipment........ 351,803 428,381 460,718
Construction in progress.................. -- 80,968 --
---------- ----------- -----------
1,591,766 2,826,572 3,237,375
Accumulated depreciation.................. (769,740) (1,265,170) (1,450,646)
---------- ----------- -----------
$ 822,026 $ 1,561,402 $ 1,786,729
========== =========== ===========
4. LEASE COMMITMENTS
Equipment with a net book value of $87,747 and $71,469, respectively, at
December 31, 1999 and 2000 (net of accumulated amortization of $2,266 and
$21,067) has been leased under capital leases which expire in 2004. The Company
leases administrative and sales offices and other equipment under noncancelable
operating leases which contain various renewal options and require payment of
common area costs, taxes and utilities, when applicable. These operating leases
expire from 2001 to 2006.
Future minimum lease payments under capital and noncancelable operating
leases at December 31, 2000 are as follows:
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ----------
2001.................................................. $ 18,706 $ 905,939
2002.................................................. 18,706 817,885
2003.................................................. 18,706 779,120
2004.................................................. 15,262 667,698
2005.................................................. -- 12,838
Thereafter............................................ -- 12,838
-------- ----------
Total future minimum lease payments......................... 71,380 $3,196,318
==========
Less amount representing interest (ranging from 7.32% to
9.25%).................................................... (10,090)
--------
Present value of future minimum lease payments.............. 61,290
Less current portion........................................ (14,290)
--------
Long-term portion........................................... $ 47,000
========
Rent expense was approximately $220,226, $379,364 and $906,015 in 1998,
1999 and 2000, respectively.
F-12
82
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
5. BORROWING ARRANGEMENTS
Line of Credit
The Company's German subsidiary has a secured line of credit with a bank of
approximately $65,000. Borrowings under the line of credit are for working
capital requirements and other general corporate purposes and bear interest at
9.5%. At December 31, 2000 and March 31, 2001, no amounts were outstanding under
the agreement.
Long-term Debt
Long-term debt consists of:
DECEMBER 31,
------------------------ MARCH 31,
1999 2000 2001
------------ -------- -----------
(UNAUDITED)
Term debt (interest at 6.4%).................... $ -- $ 16,148 $ 13,467
Capital leases (see Note 4)..................... 86,995 61,290 57,829
-------- -------- --------
Total...................................... 86,995 77,438 71,296
Current portion................................. (15,379) (21,491) (28,047)
-------- -------- --------
Long-term portion............................... $ 71,616 $ 55,947 $ 43,249
======== ======== ========
Future payment requirements of term debt at December 31, 2000 are as
follows:
YEAR ENDING
DECEMBER 31,
------------
2001...................................................... $ 7,201
2002...................................................... 7,201
2003...................................................... 1,746
-------
$16,148
=======
6. CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock
The Company had 5,833,331 shares of Series A convertible preferred stock
outstanding at December 31, 1999 and 2000 and March 31, 2001. In August 2000,
the Company issued 350,872 shares of Series B convertible preferred stock which
were outstanding at December 31, 2000 and March 31, 2001. The significant terms
of the Series A and Series B convertible preferred stock are as follows:
- Each share is convertible into one share of common stock (subject to
adjustment for events of dilution). See Note 12.
- Each share will automatically convert in the event of a public offering
in which the Company receives proceeds equal to or greater than
$7,500,000 and a price per share equal to or greater than $14.25. See
Note 12.
- Each share has voting rights equivalent to the number of shares of common
stock into which it is convertible.
F-13
83
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
- In the event of liquidation or winding up of the Company, the holders of
Series A and Series B convertible preferred stock shall receive $0.60 per
share and $14.25 per share, respectively, plus all accrued but unpaid
dividends. A sale of substantially all of the Company's assets or a
change in control is treated as a deemed liquidation.
- In the event the Board of Directors declares dividends payable on the
then outstanding common stock, the holders of Series A and Series B
preferred stock shall receive $0.03 per share and $1.14 per share,
respectively. The right to such dividends are not cumulative.
- The Series A convertible preferred stock shareholders, voting separately
as a class, shall elect two members of the Board of Directors.
Additionally, the holders of common stock and Series A preferred stock
voting collectively as a class shall elect one member of the Board of
Directors.
7. SHAREHOLDERS' EQUITY
Common Stock -- Common stock issued to the founders and certain other
employees are subject to repurchase agreements whereby the Company has the
option to repurchase the unvested shares upon termination of employment at the
original issue price. The Company's repurchase right generally lapses over four
years. At December 31, 2000, 2,944,947 shares of common stock were subject to
repurchase by the Company.
During 1998, the Company issued 4,166 shares of common stock to consultants
for services rendered. The fair value of the common stock of $625, based on the
then fair market value of common stock of $0.15 per share, was recognized as
general and administrative expense at the date of issuance.
The Company has reserved shares of common stock for issuance as follows at
December 31, 2000:
Conversion of preferred stock............................. 6,184,203
Issuance and exercise of options.......................... 1,766,193
---------
7,950,396
=========
Stock Plans -- Under the Company's 1996 and 1997 Stock Plans ("the Plans"),
the Company may grant options to purchase up to 6,333,332 shares of common stock
(731,700 from the 1996 Plan and 5,601,632 from the 1997 Plan) to employees,
directors and consultants at prices not less than the fair market value at the
date of grant for incentive stock options and not less than 85% of fair market
value for nonstatutory stock options. These options generally expire ten years
from the date of grant and become vested and exercisable ratably over a
four-year period. Certain option grants provide for the immediate exercise by
the optionee with the resulting shares issued subject to a right of repurchase
by the Company which lapses based on the original vesting provisions. At
December 31, 2000 and March 31, 2001 1,395,117 shares were available for future
grant under the Plans.
At December 31, 1998, 1999 and 2000 and March 31, 2001 the Company's
outstanding options include 67,660, 67,660, 0, and 0 shares, respectively, which
had been granted outside of the Plans.
F-14
84
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
Additional information with respect to options under the Plans, including
options granted outside the Plans, is as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
---------- ------------
Outstanding, January 1, 1998................................ 1,025,314 0.06
Granted (weighted average fair value of $0.05 per share).... 1,665,617 0.20
Exercised................................................... (1,267,302) 0.17
Canceled.................................................... (65,194) 0.06
----------
Outstanding, December 31, 1998 (417,123 shares vested and
exercisable at a weighted average exercise price of $0.06
per share)................................................ 1,358,435 0.12
Granted (weighted average fair value of $0.11 per share).... 497,656 0.38
Exercised................................................... (347,426) 0.15
Canceled.................................................... (107,986) 0.15
----------
Outstanding, December 31, 1999 (558,272 shares vested and
exercisable at a weighted average exercise price of $0.13
per share)................................................ 1,400,679 0.20
Granted (weighted average fair value of $7.16 per share).... 2,647,019 2.73
Exercised................................................... (3,440,070) 1.68
Canceled.................................................... (236,552) 0.39
----------
Outstanding, December 31, 2000 (24,971 shares vested and
exercisable at a weighted average exercise price of $0.22
per share)................................................ 371,076 4.43
Exercised*.................................................. (1,387) 0.06
----------
Outstanding, March 31, 2001 (43,852 shares vested and
exercisable at a weighted average exercise price of $0.60
per share)*............................................... 369,689 $4.45
==========
- ------------------------
* Unaudited
Additional information regarding options outstanding as of December 31,
2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER AVERAGE
REMAINING EXERCISE VESTED EXERCISE
EXERCISE NUMBER CONTRACTUAL PRICE AND PRICE
PRICES OUTSTANDING LIFE (YEARS) PER SHARE EXERCISABLE PER SHARE
-------- ----------- ------------ --------- ----------- ---------
$ 0.06 - $ 0.15 30,681 7.0 $ 0.10 15,055 $0.11
0.38 - 0.95 28,737 8.4 0.38 9,916 0.39
1.50 - 3.75 127,329 9.4 1.84 -- --
4.50 - 11.25 146,330 9.6 6.40 -- --
12.00 - 15.00 37,999 9.7 12.08 -- --
------- ------
$ 0.06 - $15.00 371,076 9.2 $ 4.43 24,971 $0.22
======= ======
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation, requires the disclosure of pro forma
net loss as if the Company had adopted the fair value method. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate the
fair value of freely
F-15
85
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including expected time to exercise, which
affect the calculated values.
The weighted average fair value of the Company's stock-based awards to
employees was estimated using the minimum value method and assuming no dividends
will be declared and the following additional assumptions:
DECEMBER 31,
--------------------
1998 1999 2000
---- ---- ----
Estimated life (in years)................................... 5.5 5.5 5.5
Risk-free interest rate..................................... 5.6% 6.0% 6.7%
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized using the accelerated method over
the options' vesting period. The Company's pro forma results are as follows (in
thousands):
DECEMBER 31,
---------------------------
1998 1999 2000
------ ------ -------
Net loss:
As reported........................................... $ (404) $ (145) $(9,097)
Pro forma............................................. (448) (198) (9,839)
Basic and diluted net loss per share:
As reported........................................... $(0.08) $(0.02) $ (1.24)
Pro forma............................................. (0.09) (0.03) (1.34)
Stock-Based Compensation
Through December 31, 1999, non-employee options and warrants were valued or
revalued, respectively, using the Black-Scholes pricing model with the following
weighted average assumptions; contractual life of 10 years; risk free interest
rates ranging from 4.6% to 6%; volatility of 40% or 50%; and no dividends during
the expected term. Non-employee options and warrants during the year ended
December 31, 2000 were valued or revalued, respectively, using the Black-Scholes
pricing model with the following weighted average assumptions: contractual life
of 10 years; risk free interest rates of 6.7%; volatility of 70%; and no
dividends during the expected term. The value of deferred stock-based
compensation related to unvested awards at December 31, 2000 is subject to
adjustment based upon the future value of the Company's common stock.
COMMON STOCK OPTIONS
During the years ended December 31, 1998, 1999 and 2000 the Company granted
nonstatutory options to consultants and advisory board members ("non-employees")
to purchase 27,466, 5,000 and 41,533 shares, respectively. These options had
weighted average exercise prices of $0.15 per share, $0.39 per share and $1.50
per share, respectively, and vesting periods, which approximated the period of
service, of immediate to five years. These options were originally valued at
$2,554, $1,537 and $376,544, respectively. The values attributable to these
options have been amortized over the service period on a graded vesting method
and the vested portion of these options were remeasured at each vesting date. No
options related to non-employees were cancelled for the periods ended December
31, 1998 and 1999. For the year ended December 31, 2000, 117,293 non-employee
options were cancelled.
F-16
86
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
During 1998, the Company sold 266,666 shares of common stock to a
consultant at $0.15 per share. The Company retained the right to repurchase the
shares at the original issue price in the event of termination of service. Such
repurchase right lapsed over a period of four years. The Company recorded
additional stock-based compensation expense over the service period for the
difference between the purchase price and the fair value of the Company's common
stock on the date the repurchase right lapsed. During 1999, the Company
terminated its remaining repurchase rights and recorded non-employee stock-
based compensation of $57,500 with respect to such shares.
During the year ended December 31, 2000, the Company issued 2,605,486
common stock options to employees at a weighted average exercise price of $2.73
per share. The weighted average exercise price was below the weighted average
deemed fair value of $9.89 per share. The cumulative deferred stock-based
compensation with respect to these grants totaled $18,662,357 and is being
amortized to expense on a graded vesting method over the four year vesting
period of the options through September 2004. During the year ended December 31,
2000, the cancellation of 17,333 of these common stock options resulted in the
reversal of $145,000 of employee stock-based compensation.
During the three months ended March 31, 2001, the Company did not issue any
common stock options. The Company repurchased 31,268 shares of common stock
through the cancellation of notes receivable which resulted in the reversal of
$237,844 of employee stock-based compensation.
COMMON STOCK WARRANTS
During 1996, the Company issued warrants to purchase 200,000 shares of the
Company's common stock at $0.06 per share to acquire software from AISS. The
warrants were originally valued at $8,286. The value attributable to these
warrants has been amortized over the vesting period of four years, which
approximated the useful life of the software, and the vested portion of this
warrant was remeasured at each vesting date. In connection with the acquisition
of AISS on April 27, 2000, warrants to purchase 33,334 shares were cancelled. No
warrants were outstanding at December 31, 2000.
Amortization of employee and non-employee stock-based compensation totaled
$61,317, $68,282, $7,292,300 and 2,556,866 in 1998, 1999, 2000 and the three
months ended March 31, 2001, respectively.
Unvested non-employee options and warrants are as follows as of:
UNVESTED OPTIONS AND WARRANTS
-----------------------------
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER PER SHARE
-------- -----------------
December 31, 1998.......................................... 257,695 $0.06
December 31, 1999.......................................... 169,382 $0.06
December 31, 2000.......................................... 4,861 $0.06
March 31, 2001 (Unaudited)................................. 2,778 $0.06
F-17
87
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
8. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1998 1999 2000 2000 2001
------- ------- ------- ------- -------
(UNAUDITED)
Net loss (numerator), basic and
diluted................................ $ (404) $ (145) $(9,097) $ (498) $(2,743)
======= ======= ======= ======= =======
Shares (denominator):
Weighted average common shares
outstanding......................... 6,222 7,229 9,445 7,483 10,884
Weighted average common shares
outstanding subject to repurchase... (1,278) (1,143) (2,089) (686) (2,819)
------- ------- ------- ------- -------
Shares used in computation, basic and
diluted................................ 4,944 6,086 7,356 6,797 8,065
======= ======= ======= ======= =======
Net loss per share -- basic and
diluted................................ $ (0.08) $ (0.02) $ (1.24) $ (0.07) $ (0.34)
======= ======= ======= ======= =======
Shares used in computation -- basic and
diluted................................ 7,356 8,065
Weighted average Series A convertible
preferred stock outstanding............ 5,833 5,833
Weighted average Series B convertible
preferred stock outstanding............ 205 500
------- -------
Shares used in computing pro forma per
share amounts on an as converted
basis -- basic and diluted............. 13,394 14,398
======= =======
Pro forma net loss per share on an as
converted basis -- basic and diluted... $ (0.68) $ (0.19)
======= =======
Pro forma net loss per share assumes that the conversion of all shares of
Series A and Series B convertible preferred stock into common stock, which
occurs upon the consummation of an initial public offering. This computation
does not include the effect of a one-time dividend charge expected to be
recorded upon conversion of the Series B convertible preferred stock (see Note
12).
F-18
88
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been anti-dilutive. Such outstanding
securities consist of the following (in thousands):
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31
-------------------------- --------------
1998 1999 2000 2000 2001
------ ------ ------ ----- -----
(UNAUDITED)
Convertible preferred stock........................ 5,833 5,833 5,977 5,833 6,184
Shares of common stock subject to repurchase....... 1,278 1,143 2,089 686 2,819
Outstanding options................................ 957 1,433 457 1,061 370
Warrants........................................... 200 200 64 200 --
9. TAX PROVISION
The tax provision in 1998 and 1999 was $341,492 and $533,087, respectively,
and primarily represents withholding tax on revenues from foreign customers. The
tax provision for the year ended December 31, 2000 of $363,000 includes
withholding tax on revenues from foreign customers of $100,000 and foreign and
U.S. income tax of $(50,000) and $313,000, respectively. The tax provision for
the three months ended March 31, 2001 of $185,000 includes withholding tax on
revenues from foreign customers of $100,000 and foreign and U.S. income tax of
$15,000 and $70,000, respectively.
During fiscal 1998 and 1999 all income (loss) before taxes was derived from
U.S. operations. During the year ended December 31, 2000 and the three months
ended March 31, 2001, respectively, income (loss) before taxes was $(8.8
million) and $(2.6 million) from U.S. operations and $38,000 and $91,000 from
foreign operations.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards.
The components of the net deferred tax liability is comprised of (in
thousands):
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000 2001
----- ----- ------- -----------
(UNAUDITED)
Net operating loss carryforward...................... $ 172 $ 38 $ -- $ --
Research and development credit carryforward......... 35 -- 63 177
Foreign tax credit carryforward...................... 365 765 544 644
Accruals deductible in different periods............. (152) (129) 1,078 1,105
Stock-based compensation............................. -- -- 324 324
Valuation allowances................................. (420) (674) (2,009) (2,250)
Intangible assets.................................... -- -- (532) (494)
----- ----- ------- -------
$ -- $ -- $ (532) $ (494)
===== ===== ======= =======
The Company has established a valuation allowance against certain deferred
tax assets due to the uncertainty surrounding the realization of such assets.
Annually, management evaluates the recoverability of the deferred tax assets and
the level of the valuation allowance. At such time as it is determined that it
is more likely than not that deferred tax assets are realizable the valuation
allowance will be reduced.
F-19
89
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
The amount of income tax recorded differs from the amount using the
statutory federal income tax rate (35%) for the following reasons (in
thousands):
THREE MONTHS
DECEMBER 31, ENDED
----------------------- MARCH 31,
1998 1999 2000 2001
---- ---- ------- ------------
(UNAUDITED)
Federal statutory tax benefit...................... $(22) $136 $(3,057) $(895)
State tax expense.................................. 1 3 1 1
Stock compensation expense......................... -- -- 2,316 895
Offering costs..................................... -- -- 440 --
Meals and entertainment............................ 8 2 4 1
Tax credits........................................ (35) -- (751) (214)
Foreign tax, net................................... -- 130 83 115
Valuation allowances............................... 363 254 1,335 241
Other.............................................. 26 8 (8) 41
---- ---- ------- -----
Total.............................................. $341 $533 $ 363 $ 185
==== ==== ======= =====
At December 31, 2000, the Company had foreign tax credit carryforwards of
approximately $544,000 available to offset future federal income taxes which
begin to expire in 2001. The extent to which the credit carryforwards can be
used to offset future taxable income and tax liabilities, respectively, may be
limited, depending on the extent of ownership changes within any three-year
period as provided in the Tax Reform Act of 1986 and the California Conformity
Act of 1987.
10. CUSTOMER AND GEOGRAPHIC INFORMATION
The Company operates in one segment. The Company had net revenues from
individual customers in excess of 10% of net revenues as follows:
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------
CUSTOMER 1998 1999 2000 2000 2001
-------- ---- ---- ---- ---- ----
(UNAUDITED)
A............................................... 66% 53% 32% 35% 31%
B............................................... 16% 19% -- -- --
C............................................... -- 15% 27% 39% 15%
D............................................... -- -- 15% 14% 17%
E............................................... -- -- 10% 11% 4%
G............................................... -- -- 6% -- 20%
F-20
90
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
The Company had accounts receivable from individual customers in excess of
10% of gross accounts receivable as follows:
DECEMBER 31, MARCH 31,
--------------------- -----------
CUSTOMER 1998 1999 2000 2001
-------- ---- ---- ----- -----------
(UNAUDITED)
A.................................................. 63% 47% 25% 54%
C.................................................. -- 15% 13% 6%
D.................................................. -- 23% 24% 17%
E.................................................. -- -- 13% 1%
F.................................................. -- 11% -- --
Revenues from customers by geographic area are as follows (in thousands):
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1998 1999 2000 2000 2001
----- ------ ------ ------ ------
(UNAUDITED)
Japan.................................. 5,125 10,684 13,209 2,733 4,974
United States.......................... 1,102 1,140 6,235 952 2,208
Europe................................. -- -- 691 9 352
The Company's long-lived assets were located primarily in North America as
of December 31, 1999. As of December 31, 2000 and March 31, 2001, long-lived
assets related to AISS, located in Germany, totaled $1.8 million and $1.7
million, respectively, of which $1.7 million and $1.5 million relates to
acquired intangibles (see Note 2). The majority of the Company's remaining
long-lived assets are in the United States.
11. EMPLOYEE BENEFIT PLAN
During 1999, the Company established a 401(k) tax-deferred savings plan,
whereby eligible employees may contribute up to 15% of their eligible
compensation with a maximum amount subject to IRS guidelines in any calendar
year. Company contributions are discretionary; no such Company contributions
have been made since inception of this plan.
12. SUBSEQUENT EVENTS
In May 2001, the Company was named as a defendant in a lawsuit claiming,
among other things, that it misappropriated trade secrets in connection with
hiring an employee. The Company is defending itself against the claims, which it
believes to be without merit. The Company does not believe that this litigation,
or resolution of this litigation, will have a material negative impact on its
consolidated financial position or results of operations.
On June 28, 2001, the Company entered into a common stock purchase
agreement with Applied Materials, Inc., or Applied Materials, under which the
Company agreed to sell Applied Materials 500,000 shares of common stock (or such
lesser amount of shares having a maximum aggregate purchase price of $10.0
million) in a private placement concurrent with and conditioned upon the sale of
shares in the planned initial public offering. The price per share in the
concurrent private placement will be equal to the offering price in the planned
initial public offering.
On July 6, 2001, the Company amended and restated its articles of
incorporation to effect a two-for-three reverse stock split of the Company's
common and preferred stock. All share and per share amounts
F-21
91
PDF SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THREE MONTHS ENDED MARCH 31,
2000 AND 2001
(INFORMATION AS OF MARCH 31, 2001 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
reflected in the consolidated financial statements have been restated to give
effect to the two-for-three reverse stock split.
On July 6, 2001, the Company also amended and restated its articles of
incorporation to provide for the automatic conversion of all outstanding Series
A and Series B convertible preferred stock upon consummation of a public
offering in which the Company receives proceeds equal to or greater than
$7,500,000; provided that in the event the public offering price is less than
$14.25 per share, the Series B preferred stock will be converted into an
aggregate of 499,987 shares of common stock. Based on an assumed initial public
offering price of $12.00 per share, the Company expects to record a one time
dividend charge of $1,619,000 upon consummation of the planned initial public
offering, representing the fair value of additional shares expected to be issued
to the Series B convertible preferred stockholders in excess of the shares
issuable pursuant to the original terms of the Series B convertible preferred
stock. The effects of such additional shares have been reflected in the
accompanying unaudited pro forma balance sheet.
On June 12, 2001, the Board of Directors approved, and on July 6, 2001, the
shareholders approved, the following actions to occur prior to or concurrent
with the effectiveness of the Company's planned initial public offering:
- Reincorporation of the Company in the State of Delaware;
- Increase in the authorized shares of common stock to 75,000,000 shares,
par value $0.00015 per share, and creation of a new series of preferred
stock with 5,000,000 shares authorized;
- Termination of the 1996 and 1997 Stock Option Plans as to future option
grants;
- Adoption of the 2001 Stock Plan -- 3,000,000 shares of common stock will
be reserved for issuance under the 2001 Stock Plan. On January 1 of each year,
starting with the year 2002, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock that
are outstanding at that time; and
- Adoption of the 2001 Employee Stock Purchase Plan -- Under the purchase
plan, eligible employees are allowed to have salary withholdings of up to 10% of
their compensation to purchase shares of common stock at a price equal to 85% of
the lower of the market value of the stock on the first date immediately before
the first day of the applicable offering period or the fair market value on the
purchase date. The initial offering period commences upon the effective date for
the initial public offering of the Company's common stock. For the first
offering period, shares of common stock may be purchased at a price equal to 85%
of the lower of the price per share in the initial public offering or the market
value on the purchase date. The Company has initially reserved 300,000 shares of
common stock under this plan, plus an annual increase to be added each January
beginning with the year 2002 equal to the lesser of (i) 675,000 shares, or (ii)
2% of the shares of common stock outstanding at that time.
* * * * *
F-22
92
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Applied Integrated Systems & Software Entwicklungs-, Produktions- und Vertriebs
GmbH:
We have audited the accompanying balance sheet of Applied Integrated
Systems & Software Entwicklungs-, Produktions- und Vertriebs GmbH as of December
31, 1999, and the related statements of income, shareholders' equity, and cash
flows for the year ended December 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Applied Integrated Systems & Software
Entwicklungs-, Produktions- und Vertriebs GmbH as of December 31, 1999, and the
results of its operations and its cash flows for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE GMBH
/s/ Wirtschaftsprufungsgesellschaft
Munich, Germany
July 26, 2000
F-23
93
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
BALANCE SHEETS
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... DM 377,539 DM 11,858
Accounts receivable....................................... 331,700 763,830
Prepaid expenses.......................................... 1,421 --
Other assets.............................................. 21,065 18,801
Current deferred taxes.................................... 72,129 74,729
----------- -----------
Total current assets................................... 803,854 869,218
Equipment, furniture, and fixtures, net..................... 102,389 106,280
Intangible assets, net...................................... 14,053 12,391
Other assets................................................ 18,144 --
----------- -----------
Total assets........................................... DM 938,440 DM 987,889
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Short term portion of long term borrowings................ DM 14,069 DM 14,294
Bank overdraft............................................ -- 415,741
Accounts payable.......................................... 118,654 111,726
Accrued taxes............................................. 8,154 92,350
Deferred revenue.......................................... 10,000 12,000
Accrued expenses and other liabilities.................... 433,455 423,740
----------- -----------
Total current liabilities.............................. 584,332 1,069,851
Long term borrowings........................................ 33,620 29,961
Deferred tax liability...................................... 31,154 21,432
Shareholders' equity (deficiency):
Registered capital........................................ 51,000 51,000
Less: subscribed capital.................................. (25,500) (25,500)
----------- -----------
Registered capital -- paid in............................. 25,500 25,500
Retained earnings (distributions to shareholders in excess
of earnings to date)................................... 263,834 (158,855)
----------- -----------
Total shareholders' equity (deficiency)................ 289,334 (133,355)
----------- -----------
Total liabilities and shareholders' equity
(deficiency)......................................... DM 938,440 DM 987,889
=========== ===========
See notes to financial statements.
F-24
94
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
INCOME STATEMENTS
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1999 1999 2000
------------ ---------- ---------
(UNAUDITED)
Revenues:
Services....................................... DM1,914,145 DM 378,322 DM461,922
License........................................ 837,962 440,424 125,815
----------- ---------- ---------
2,752,107 818,746 587,737
----------- ---------- ---------
Costs and expenses:
Cost of services............................... 1,056,259 249,408 283,616
Research and development expenses.............. 510,768 66,659 35,155
Sales and marketing expenses................... 325,487 78,458 45,087
General and administrative expenses............ 576,654 126,692 131,575
----------- ---------- ---------
Total costs and expenses.................... 2,469,168 521,217 495,433
----------- ---------- ---------
Operating income................................. 282,939 297,529 92,304
Other income..................................... 775 -- 1,096
Interest income.................................. 4,430 474 1,725
Interest expenses................................ (8,087) (562) (6,839)
----------- ---------- ---------
Income before income taxes....................... 280,057 297,441 88,286
Provision for income taxes....................... (97,877) (161,902) (42,395)
----------- ---------- ---------
Net income....................................... DM 182,180 DM 135,539 DM 45,891
=========== ========== =========
See notes to financial statements.
F-25
95
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
RETAINED TOTAL
REGISTERED CAPITAL - ADDITIONAL EARNINGS SHAREHOLDERS
PAID IN PAID IN CAPITAL (DEFICIENCY) EQUITY (DEFICIENCY)
-------------------- --------------- ------------ -------------------
Balance, January 1, 1999........... DM25,500 DM -- DM 201,654 DM 227,154
Net income and total comprehensive
income........................... 182,180 182,180
Distributions...................... (120,000) (120,000)
-------- --------- ---------- ----------
Balance, December 31, 1999......... 25,500 -- 263,834 289,334
Net income and total comprehensive
income*.......................... 45,891 45,891
Additional paid in capital
resulting from sale of PDF shares
to shareholders*................. 70,753 70,753
Distributions*..................... (70,753) (468,580) (539,333)
-------- --------- ---------- ----------
Balance, March 31, 2000*........... DM25,500 DM -- DM(158,855) DM(133,355)
======== ========= ========== ==========
- ---------------
* Unaudited
See notes to financial statements.
F-26
96
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------
1999 1999 2000
------------ ---------- ----------
(UNAUDITED)
Operating activities:
Net income..................................... DM 182,180 DM 135,539 DM 45,891
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 140,206 20,237 23,645
Deferred income taxes....................... (47,839) (13,137) (2,600)
Changes in operating assets and liabilities:
Accounts receivable....................... (211,151) (399,522) (432,130)
Prepaid expenses and other assets......... 25,798 (111,210) 3,685
Accounts payable.......................... 31,793 11,024 (6,929)
Other accrued liabilities and income taxes
payable................................ (48,606) 24,309 (2,504)
Deferred revenues......................... 3,800 1,000 2,000
---------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 76,181 (331,760) (368,942)
---------- ---------- ----------
Investing activities:
Equipment additions............................ (178,473) (115,598) (25,874)
Payment to exercise warrants................... (20,320)
---------- ---------- ----------
Net cash used in investing activities............ (178,473) (115,598) (46,194)
---------- ---------- ----------
Financing activities:
Shareholder distributions...................... (120,000) (539,333)
Proceeds from borrowings....................... 59,900 59,900
Repayments of borrowings....................... (12,211) (2,233) (3,434)
Proceeds from sale of PDF stock to
shareholders................................ 176,481
Bank overdraft................................. (270) 415,741
---------- ---------- ----------
Net cash provided by (used in) financing
activities..................................... (72,311) 57,397 49,455
---------- ---------- ----------
Net decrease in cash............................. (174,603) (389,961) (365,681)
Cash at beginning of period...................... 552,142 552,142 377,539
---------- ---------- ----------
Cash at end of period............................ DM 377,539 DM 162,181 DM 11,858
========== ========== ==========
Supplemental cash flow information:
Cash payments for interest..................... DM 8,086 DM 562 DM 6,839
Cash payments for income taxes................. 148,954 27,590 37,238
See notes to financial statements.
F-27
97
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(INFORMATION AS OF MARCH 31, 2000 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Applied Integrated Systems and Software Entwicklungs-, Produktions- und
Vertriebs GmbH (the "Company" or "AISS") was founded on February 24, 1989 and
develops software tools for the semiconductor industry.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information as of March 31, 2000 and for the three
months ended March 31, 1999 and 2000 is unaudited and has been prepared on the
same basis as the audited financial statements. In the opinion of management,
such unaudited financial information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
interim information. The operating results for the three months ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
full fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("US GAAP")
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Despite
management's best effort to establish good faith estimates and assumptions,
actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from services, primarily consulting and research and development
arrangements, is recognized as the related services are performed. Software
license and maintenance revenue is recognized in accordance with the provisions
of Statement of Position No. 97-2 "Software Revenue Recognition." License fees
are recognized when an agreement has been signed, the software has been
delivered, the license fee is fixed or determinable and collection of the fee is
probable and vendor-specific objective evidence of fair value exists to allocate
a portion of the total fee to any undelivered elements of the arrangement, or
over the license term. Maintenance obligations generally call for the Company to
provide technical support and software updates to customers. Maintenance to be
provided within one year included in an initial license fee is recognized
together with the license fee and the estimated cost of providing such service
is accrued. Revenue under other maintenance contracts is deferred and recognized
ratably over the term of the maintenance contract, which is generally one year.
COST OF SERVICES
Cost of professional services and maintenance consists primarily of
salaries and benefits, including cost of services provided by third party
consultants engaged by the Company.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company operates in the software industry and can be affected by a
variety of factors. For example, management of the Company believes that changes
in any of the following areas could have a significant negative effect on the
Company in terms of its future financial position, results of operations
F-28
98
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(INFORMATION AS OF MARCH 31, 2000 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
and cash flows: ability to obtain additional financing; regulatory changes;
fundamental changes in the technology underlying software products; market
acceptance of the Company's products under development; development of sales
channels; litigation or other claims against the Company; the hiring, training
and retention of key employees; successful and timely completion of product
development efforts; and new product introductions by competitors.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of account receivables. The
Company performs ongoing credit evaluations of its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable and
borrowings approximates fair value due to the short-term nature of these
instruments. The fair value of the warrants as of December 31, 1999 was
approximately DM170,000.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are recorded at cost less accumulated
depreciation. Depreciation is provided on the straight-line method over the
estimated useful lives (three to ten years) of the related assets.
OTHER ASSETS
Long-term assets include warrants for the purchase of 300,000 shares of PDF
Solutions, Inc. ("PDF") common stock at DM 0.06 per share. These warrants were
obtained from PDF in an agreement dated September 17, 1996 related to the use of
one of the Company's software products. The warrants vested 25% after one year
and at a rate of one forty-eighth per month thereafter. The value of the
warrants was recorded as license revenue of DM 18,144 which approximated the
estimated fair value of the warrants at the date of issuance under the
Black-Scholes pricing model with the following assumptions: contractual life of
10 years; risk-free interest rate of 6.0%; volatility of 50% and no dividends
during the expected term. The vested warrants at December 31, 1999 totaled
243,750 shares which increased to 249,999 in January 2000. In January 2000, the
Company exercised the vested warrants (see Note 5). In connection with the
acquisition of the Company by PDF on April 27, 2000 (see Note 9), the Company
agreed to the cancellation of the remaining 50,001 warrants, of which 18,750 had
vested through the date of acquisition.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The cost of
developing new software products and enhancements are expensed as research and
development costs as incurred because the Company believes that establishment of
technological feasibility occurs concurrently with the date of general release
of related products.
F-29
99
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(INFORMATION AS OF MARCH 31, 2000 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
INTANGIBLE ASSETS
Intangible assets represent internal use software and are recorded at cost
and are amortized over periods ranging from three to five years. Accumulated
amortization was approximately DM19,186 at December 31, 1999.
INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between the valuation of assets and liabilities in the financial
statements and the carrying amounts for tax purposes. Such differences are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
EARNINGS PER SHARE
The Company is organized as a GmbH and has no tradable shares. Earnings per
share has not been calculated.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that an enterprise
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources. Comprehensive income was equal to net
income for all periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairment charge has
been recorded in any of the periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133 is effective for fiscal years beginning after June
15, 2000 and must be applied to instruments issued, acquired or substantively
modified after December 31, 1997. The Company does not expect the adoption of
the accounting pronouncement to have a material effect on its financial
position, results of operations or cash flows.
F-30
100
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(INFORMATION AS OF MARCH 31, 2000 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 2: EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures at December 31 consist of:
Equipment, furniture and fixtures...................... DM 309,065
Accumulated depreciation............................... (206,676)
----------
DM 102,389
==========
NOTE 3: BORROWINGS
The Company has a DM 150,000, secured line of credit with a bank.
Borrowings under the line of credit are for working capital requirements and
other general corporate purposes and bear an interest rate of 9.5 percent. The
credit agreement is secured by the shareholders of the Company. At December 31,
1999, the Company did not have any amounts outstanding under the agreement.
The Company borrowed DM 59,900 at approximately 6.4 percent in January 1999
to finance the acquisition of an automobile. The term of the financing was for a
term of approximately four years. The required reductions in principle in the
next three years are as follows:
2000............................................. DM14,069
2001............................................. 14,994
2002............................................. 18,626
--------
DM47,689
========
NOTE 4: ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 31, 1999 consisted of
the following:
Accrued compensation and related benefits............... DM362,428
Warranty................................................ 50,400
Other................................................... 20,627
---------
DM433,455
=========
NOTE 5: SHAREHOLDERS' EQUITY (DEFICIENCY)
The registered capital of the Company amounted to DM 51,000 as of December
31, 1999, of which DM 25,500 has been paid in by the company's shareholders.
On January 4, 2000, the Company exercised the warrants for shares in PDF
Solutions Inc. that were issued on September 17, 1996. At the date the warrants
were exercised, the Company paid DM 20,320 for the 249,999 shares. The
shareholders of the Company then purchased these warrants from the Company for
DM 176,408. The after tax gain related to this related party transaction was
recorded as a contribution to additional paid in capital. The additional paid in
capital was repaid to the shareholders in March 2000.
F-31
101
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(INFORMATION AS OF MARCH 31, 2000 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 6: INCOME TAXES
Federal corporation income tax is levied at 40 percent and a solidarity
surcharge is levied on the federal corporate tax rate. The solidarity tax rate
was 5.50 percent in 1999. Upon distribution of retained earnings to
shareholders, the corporation tax rate on the distributed earnings is reduced to
30 percent.
German trade income tax is levied at a rate of approximately 19.7 percent.
This tax can be deducted from the corporation tax.
The significant components of the net deferred tax asset at December 31,
1999 which reflect the tax effects of the Company's temporary differences are as
follows:
NET DEFERRED TAX ASSETS -- CURRENT:
Vacation accrual............................................ DM38,102
Warranty accrual............................................ 27,004
Deferred revenue............................................ 5,358
Other....................................................... 1,665
--------
72,129
--------
NET DEFERRED TAX LIABILITY -- NON-CURRENT:
Capital expenditures reserve................................ 21,432
Warrants.................................................... 9,722
--------
31,154
--------
Net deferred tax asset...................................... DM40,975
========
The provision for income taxes consists of the following:
Current......................................... DM145,716
Deferred........................................ (47,839)
---------
DM 97,877
=========
The provision for income taxes differs from the amounts computed by
applying the Federal corporation income tax rate to income before income taxes,
as follows:
Amounts computed by applying Federal statutory rate...... DM112,023 40.0%
Trade tax, net of Federal income taxes................... 31,870 11.4%
Solidarity tax........................................... 3,733 1.3%
Credit for dividend distribution......................... (49,792) (17.8)%
Other.................................................... 43 --
--------- -----
DM 97,877 34.9%
========= =====
F-32
102
APPLIED INTEGRATED SYSTEMS AND SOFTWARE GMBH
ENTWICKLUNGS-, PRODUKTIONS- UND VERTRIEBS GMBH
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(INFORMATION AS OF MARCH 31, 2000 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 7: OPERATING LEASES
The Company leases certain facilities and equipment under noncancelable
operating lease arrangements. Rent expense is reflected on a straight-line basis
over the term of the lease. Future minimum rental payments at December 31, 1999
under these leases, which expire in the first quarter of 2002, are as follows:
2000............................................ DM112,000
2001............................................ 112,000
2002............................................ 10,000
---------
Total................................. DM234,000
=========
Total rent expense under all operating leases was approximately DM 91,560
for the year ended December 31, 1999.
NOTE 8: BUSINESS SEGMENT
The Company operates in one industry segment consisting of developing,
distribution, and maintenance for software, computer hardware and technical
supply. The company's operations are primarily in Germany.
The following customers, a German electronics company and PDF Solutions,
Inc., accounted for 53% and 33% of the net revenues of the Company in 1999,
respectively.
NOTE 9: SUBSEQUENT EVENT
On April 27, 2000, the Company was acquired by PDF Solutions Inc., a U.S.
company, for approximately DM 2,647,375 (US$1,250,000). PDF Solutions provides
comprehensive infrastructure technologies and services to improve yield and
optimize performance of integrated circuits.
F-33
103
PDF SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
On April 27, 2000, the Company acquired all of the outstanding common stock
of Applied Integrated Systems and Software GmbH ("AISS"), a German company, for
$1.25 million, consisting of $995,000 in notes payable and $255,000 in cash.
AISS develops software and provides yield management services to the
semiconductor industry. The acquisition is accounted for using the purchase
method and the Company's consolidated financial statements reflect the results
of operations of AISS from the date of acquisition. The aggregate purchase price
was allocated to the assets and liabilities acquired based on their fair value
at date of acquisition. The total consideration (including costs of acquisition)
exceeds the fair value of the net tangible assets and liabilities assumed by
$2.0 million, which was allocated: $662,000 to acquired technology, $540,000 to
employee workforce and $807,000 to goodwill which are being amortized over a
period of four years.
The accompanying unaudited pro forma consolidated financial statements are
presented in accordance with Article 11 of Regulation S-X.
The accompanying unaudited pro forma consolidated statements of operations
give effect to the acquisition of AISS as if it had occurred on January 1, 2000,
by consolidating the results of operations of AISS with PDF for the year ended
December 31, 2000.
The unaudited pro forma consolidated information is presented for
illustrative purposes only, and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or the financial position of the combined companies.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements of the Company and AISS.
F-34
104
PDF SOLUTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
AISS(1)
JANUARY 1, 2000 PRO FORMA
PDF TO APRIL 27, 2000 ADJUSTMENTS NOTES PRO FORMA
------------------ ----------------- ----------- ----- -----------
Revenue:
Design-to-silicon yield
solutions..................... $15,538,325 $481,508 $ (159,465) (2) $15,860,368
Gain share....................... 4,597,000 -- -- 4,597,000
----------- -------- ---------- -----------
Total revenue................. 20,135,325 481,508 (159,465) 20,457,368
----------- -------- ---------- -----------
Costs and expenses:
Cost of design-to-silicon yield
solutions..................... 6,915,001 205,930 (76,543) (2) 7,044,388
Research and development......... 6,418,173 44,457 (82,922) (2) 6,379,708
Selling, general and
administrative................ 7,332,857 128,288 163,686 (3) 7,624,831
Offering costs................... 1,257,617 -- -- 1,257,617
Stock-based compensation
amortization.................. 7,292,300 -- -- 7,292,300
----------- -------- ---------- -----------
Total costs and expenses...... 29,215,948 378,675 4,221 29,598,844
----------- -------- ---------- -----------
Income (loss) from operations...... (9,080,623) 102,833 (163,686) (9,141,476)
Interest income and other.......... 346,895 (331) (23,216) (4) 323,348
----------- -------- ---------- -----------
Income (loss) before taxes......... (8,733,728) 102,502 (186,902) (8,818,128)
Tax provision (benefit)............ 363,000 29,969 (80,549) (5) 312,420
----------- -------- ---------- -----------
Net income (loss).................. $(9,096,728) $ 72,533 $ (106,353) $(9,130,548)
=========== ======== ========== ===========
Pro forma net loss per
share -- basic and diluted(6).... $ (1.24) $ (1.24)
=========== ===========
Shares used in computing pro forma
basic and diluted net loss per
share(6)......................... 7,356,221 7,356,221
=========== ===========
See notes to unaudited pro forma consolidated statements of operations.
F-35
105
PDF SOLUTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following pro forma adjustments have been made to the unaudited pro
forma consolidated statements of operations:
1. Amount translated from DM to US dollars using average annual exchange
rate of DM1.998/$ for the period January 1, 2000 to April 27, 2000,
respectively.
2. Reflects the elimination of sales representing research and development
services performed by AISS for the Company.
3. Reflects the amortization of intangible assets totaling $2.0 million
resulting from the acquisition on a straight line basis over four years.
4. Reflects interest charges on the notes payable issued in connection with
the acquisition at the stated interest rate of 7%.
5. Reflects the net tax benefit of the pro forma adjustments at the
statutory tax rate for the respective tax jurisdictions.
6.On July 6, 2001, the Company amended and restated its articles of
incorporation to effect a two-for-three reverse stock split of the
Company's common and preferred stock. The pro forma net loss per
share -- basic and diluted and shares used in computing pro forma basic
and diluted net loss per share have been restated to give effect to the
two-for-three reverse stock split.
* * * *
F-36
106
[PDF Solutions, Inc. Logo]
107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee and the Nasdaq National Market listing
fee.
AMOUNT
TO BE PAID
----------
SEC registration fee........................................ $ 19,800
NASD filing fee and expenses................................ 10,000
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 350,000
Blue Sky qualification fees and expenses.................... 10,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous fees and expenses............................. 55,200
----------
Total..................................................... 1,050,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IV of our Certificate of
Incorporation (Exhibit 3.2 hereto) and Article VI of our Bylaws (Exhibit 3.3
hereto) provide for indemnification of our directors, officers, employees and
other agents to the maximum extent permitted by Delaware Law. In addition, we
have entered into Indemnification Agreements (Exhibit 10.1 hereto) with our
officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides
for cross-indemnification among us and the Underwriters with respect to certain
matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since November, 1995 we have sold and issued the following securities:
1. On December 4, 1995, we issued 5,833,331 shares of Series A preferred
stock to investors for an aggregate cash consideration of $0.60 per share or
$3,500,000.
2. On August 4, 2000, we issued 350,872 shares of Series B preferred stock
to investors for an aggregate cash consideration of $14.25 per share or
$5,000,000.
3. From inception through March 31, 2001, we have issued warrants to
purchase 166,666 shares of common stock at a price of $0.06 per share. These
warrants have been exercised and no warrants remain outstanding.
4. From our inception through March 31, 2001, we have issued 6,035,606
options and rights to purchase common stock of PDF with a weighted average
exercise price of $1.29 per share to a number of our employees, and directors
and consultants.
5. On June 28, 2001, we entered into an agreement with Applied Materials,
or Applied Materials, to sell 500,000 shares of our common stock (or such lesser
amount of shares having a maximum aggregate purchase price of $10.0 million) to
Applied Materials concurrent with and conditioned upon the sale of the shares in
the initial public offering at a price per share equal to the initial public
offering price.
II-1
108
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or Regulation
D, or other applicable exemption of such Securities Act as transactions by an
issuer not involving any public offering. In addition, certain issuances
described in Item 2 were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature page of
this Form S-1, which is incorporated herein by reference.
(b) Financial Statement Schedules
Independent Auditors' Report................................ Page S-1
Schedule II -- Valuation and Qualifying Accounts............ Page S-2
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Jose, State of
California on July 9, 2001
PDF SOLUTIONS, INC.
By: /s/ P. STEVEN MELMAN
------------------------------------
P. Steven Melman
Chief Financial Officer and Vice
President, Finance and
Administration
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on July 9, 2001
in the capacities indicated:
SIGNATURE TITLE
--------- -----
/s/ JOHN K. KIBARIAN* Director, President and Chief
- --------------------------------------------- Executive Officer (Principal
John K. Kibarian Executive Officer)
/s/ P. STEVEN MELMAN Chief Financial Officer and Vice
- --------------------------------------------- President, Finance and
P. Steven Melman Administration (Principal Financial
and Accounting Officer)
/s/ B.J. CASSIN* Director
- ---------------------------------------------
B.J. Cassin
/s/ LUCIO L. LANZA* Director
- ---------------------------------------------
Lucio L. Lanza
/s/ DONALD L. LUCAS* Director
- ---------------------------------------------
Donald L. Lucas
/s/ KIMON MICHAELS* Director
- ---------------------------------------------
Kimon Michaels
*By: /s/ P. STEVEN MELMAN
---------------------------------------
P. Steven Melman
Attorney-In-Fact
II-3
110
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
PDF Solutions, Inc.
We have audited the consolidated financial statements of PDF Solutions,
Inc. and its subsidiaries (collectively, the "Company") as of December 31, 1999
and 2000 and for each of the three years in the period ended December 31, 2000
and have issued our report thereon dated January 19, 2001 (July 6, 2001 as to
the third paragraph of Note 12); such consolidated financial statements and
report are included elsewhere in the Company's Registration Statement on Form
S-1. Our audits also included the consolidated financial statement schedule of
PDF Solutions, Inc, listed in Item 16(b). This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
January 19, 2001
S-1
111
SCHEDULE II
PDF SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO DEDUCTIONS/ BALANCE AT
BEGINNING OF COSTS AND WRITE-OFFS OF END OF
DATE: PERIOD EXPENSES ACCOUNTS PERIOD
----- ------------ ---------- ------------- ----------
Allowance for doubtful accounts
March 31, 2001*............................ $192,000 $ -- $-- $192,000
December 31, 2000.......................... $144,000 $48,000 $-- $192,000
December 31, 1999.......................... $ 93,000 $51,000 $-- $144,000
December 31, 1998.......................... $ 53,000 $40,000 $-- $ 93,000
- ------------------------
* Unaudited
S-2
112
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement (subject to negotiation).
3.1 Amended and Restated Certificate of Incorporation of PDF
Solutions, Inc.*
3.2 Third Amended and Restated Certificate of Incorporation of
PDF Solutions, Inc. (proposed).
3.3 Amended and Restated Bylaws of PDF Solutions, Inc.*
3.4 Amended and Restated Bylaws of PDF Solutions, Inc.
(proposed).*
4.1 Specimen Stock Certificate.
4.2 Second Amended and Restated Rights Agreement dated July 6,
2001.
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP regarding the
legality of the common stock being registered.
10.1 [Intentionally Deleted]
10.2 [Intentionally Deleted]
10.3 [Intentionally Deleted]
10.4 [Intentionally Deleted]
10.5 [Intentionally Deleted]
10.6 Technology Cooperation Agreement between PDF Solutions, Inc.
and Toshiba Corporation.+
10.7 Form of Indemnification Agreement between PDF Solutions,
Inc. and each of its Officers and Directors.*
10.8 1996 Stock Option Plan and related agreements.*
10.9 1997 Stock Plan and related agreements.*
10.10 2001 Stock Plan and related agreements.
10.11 2001 Employee Stock Purchase Plan.
10.12 Lease Agreement between PDF Solutions, Inc. and Metropolitan
Life Insurance Company dated April 1, 1996.*
10.13 Credit Agreements between PDF Solutions, Inc. and Imperial
Bank dated July 6, 1999 and August 12, 1999.*
10.14 Offer letter to P. Steven Melman dated July 9, 1998.*
10.15 Integration Technology Agreement between PDF Solutions, Inc.
and Matsushita Electronics Corporation.+
10.16 Software OEM License Agreement between PDF Solutions, Inc.
and Cadence Design Systems, Inc.+
10.17 Yield Improvement Agreement between PDF Solutions, Inc. and
Toshiba Corporation.+
10.18 Software Site License between PDF Solutions, Inc. and
Toshiba Corporation.+
21.1 List of Subsidiaries.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Deloitte & Touche GmbH.
23.3 Consent of Orrick, Herrington & Sutcliffe LLP (part of
Exhibit 5.1).
24.1 Power of Attorney (see page II-3).*
- ---------------
* Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 333-43192) on August 7, 2000.
** Previously filed with Amendment No. 2 to Registrant's Registration Statement
on Form S-1 (File No. 333-43192) on September 30, 2000.
+ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.