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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-31545
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SYNPLICITY, INC.
(Exact name of registrant as specified in its charter)
California 77-0368779
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
935 Stewart Drive,
Sunnyvale, California 94086
(Zip Code)
Registrant's telephone number, including area code: (408) 215-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on February
27, 2001 as reported on the Nasdaq National Market, was approximately
$130,791,905. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 27, 2001, the registrant had outstanding 24,284,795 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for its 2001 Annual Meeting
of Shareholders.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K, the exhibits hereto and the information
incorporated by reference herein contain "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such forward looking statements involve risks
and uncertainties. When used in this Report, the words "expects,"
"anticipates," and "estimates" and similar expressions are intended to identify
forward looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include those discussed below and
those discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" or incorporated by reference herein. Synplicity,
Inc. ("we", "us" or "Synplicity") undertakes no obligation to publicly release
any revisions to these forward looking statements to reflect events or
circumstances after the date this Report is filed with the Securities and
Exchange Commission or to reflect the occurrence of unanticipated events.
Overview
We are a leading provider of software products that enable the rapid and
effective design and verification of large, complex semiconductors used in
internet infrastructure hardware, including next generation networking and
communications equipment, as well as various electronic devices. Our synthesis
software performs essential steps in the process of designing semiconductors
such as field programmable gate arrays ("FPGAs"), application specific
integrated circuits ("ASICs") and system on a chip ASICs that also include a
microprocessor ("SOCs"). We employ proprietary logic synthesis and physical
synthesis technology to simplify, improve and accelerate the design and
verification of large complex semiconductors, in particular, high-end FPGAs. We
believe our software products, coupled with our expert customer support, enable
our customers to meet performance goals and decrease the time to market of
their products.
Industry Background
Internet infrastructure, next generation networking and communications
equipment
The internet continues to expand rapidly as a global medium for
communications, entertainment and commerce, redefining the way many businesses
and consumers interact and exchange information. The growth in internet use has
led to increased demand for high speed wireline and wireless networks, known as
next generation networks. Communications carriers, cable operators, internet
service providers, corporations and other entities are deploying next
generation networking equipment, which facilitates the transmission of the
growing volumes of network traffic. This equipment includes fiber optic
backbone equipment, broadband access equipment, routers, switches, satellite
devices, base station equipment for wireless data and other infrastructure
equipment. In its publication "U.S. Industry and Trade Outlook 2000," the
United States Department of Commerce estimates that the projected worldwide
market size for telecommunications equipment in 2001 will be over $400 billion.
Intense competition and rapid technological advances have increased the
pressure on next generation networking equipment manufacturers to design and
produce equipment with higher performance, greater reliability and more
sophisticated features. Equipment providers must meet a challenging set of
requirements to be successful. Shorter product life cycles and competitive
markets require vendors to reduce the period from design to sale, known as time
to market. Networking and communications markets are complex and rapidly
changing. The constant evolution of standards by which networking equipment
manufactured by different vendors can communicate also increases pressure on
next generation networking equipment providers when designing new products.
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In response to these competitive dynamics on the internet infrastructure and
next generation networks, networking equipment vendors are demanding enhanced
functionality from the semiconductors used in their products. inSearch
Research, a market research firm, projects that the value of semiconductors in
selected communications-related applications will grow at a compound annual
growth rate of approximately 21% from 1999 to 2004 and that spending for
semiconductor components of communications-related applications will reach
approximately $70.7 billion per annum by 2004.
Use of FPGAs, ASICs and SoCs for internet infrastructure, next generation
networking and communications equipment
Manufacturers of next generation networking equipment employ a wide variety
of advanced semiconductors, including ASICs and SOCs and increasingly,
programmable semiconductors. Unlike standard, off the shelf semiconductors,
ASICs, SoCs and programmable semiconductors, such as FPGAs, are tailored to
perform specific functions defined by electronic product designers. ASICs and
SoCs are semiconductors that are customized prior to manufacture to perform a
specific function, whereas FPGAs are customized, or programmed, after the
semiconductors are manufactured. ASICs, SoCs and FPGAs are used to implement
proprietary intellectual property and to provide the equipment manufacturer's
products with enhanced performance, flexibility and differentiation from those
of competitors. ASICs and SoCs can achieve higher performance, lower power
consumption and lower unit cost when produced in volume than FPGAs. However,
ASICs and SoCs have longer development cycles as well as lengthy and expensive
custom fabrication processes prior to shipment to the equipment manufacturer.
FPGAs provide next generation networking equipment manufacturers with the
ability to create and modify semiconductor designs quickly and easily and make
changes even after the product is used by the customer. This ease of creation
and modification helps electronics manufacturers meet time to market
requirements by shortening development times. In this respect, FPGAs provide
equipment manufacturers with the ability to get to market quickly and the
flexibility to update their products to address rapidly changing industry and
interoperability standards. To take advantage of their relative strengths,
several vendors have announced plans to create semiconductors that combine an
ASIC with a FPGA on a single chip.
We believe that the expanded capacity and performance of ASICs and SoCs and
the relative ease of use and design flexibility of FPGAs will continue to fuel
growth in the use of these semiconductors in next generation networking
equipment. The capacity of FPGAs, ASICs and SoCs has increased in accordance
with Moore's law, which predicts that the functional capacity of semiconductors
will double approximately every 18 months. The advanced manufacturing processes
that facilitate these capacity increases also improve performance and further
expand the breadth of applications for which the semiconductors can be used.
According to the Semiconductor Industry Association's November 2000 estimates,
the total market size for ASICs is forecasted to grow from $9.8 billion in 1999
to $17 billion in 2003, while the market for FPGAs and other programmable
semiconductors is estimated to grow from $2.9 billion in 1999 to $11.1 billion
in 2003. This represents a compound growth rate of 15% for ASICs and 40% for
FPGAs.
Challenges of designing FPGAs, ASICs and SoCs for internet infrastructure,
next generation networking and communications equipment
While higher capacity, more complex FPGAs, ASICs and SoCs are used in the
design of next generation networking equipment, they often require significant
resources to design and test their functionality. Large semiconductor designs
require more time to develop and test, which may limit the network equipment
manufacturer's ability to get to market quickly. While state of the art
semiconductors are designed to achieve high performance standards, reaching
these performance goals can require time consuming design processes. Electronic
product designers seek design solutions that increase productivity, are easy to
learn and use and result in high performance designs. To achieve these
objectives, electronic product designers, including equipment manufacturers
using FPGAs, ASICs and SoCs, have recognized the advantage of software
solutions, which can address critical needs.
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To date, these software solutions have focused on several functions
including:
. Logic synthesis. Logic synthesis software compiles a high level textual
description of the desired function of a semiconductor into an optimized
network of elements, each of which is known as a logic or memory element.
Because the logic and memory elements must interact and exhibit high
performance, logic synthesis is critical to reduce the number of required
components and improve the frequency at which the semiconductor can be
operated.
. Physical synthesis. Physical synthesis software combines the function of
logic synthesis software with some of the functions of placement and
routing software. Placement and routing software processes the optimized
description of the semiconductor created by logic synthesis to place the
logic and memory elements in locations on the semiconductor and to assign
routes for wires between those placed elements. The goal is to keep wires
short in order to maximize performance. Because a physical synthesis
system controls the locations of elements, it can more easily identify
performance limitations and fix them with a combination of placement
changes and logic synthesis optimizations.
. Verification. Verification software uses the information about the
functions of the semiconductor to test whether it will perform as
intended. For example, with ASICs, the designer must verify whether the
semiconductor will perform as intended and whether the proposed design
works with other components of the resulting product, such as software or
a communication module. Mistakes not identified prior to chip manufacture
are costly and require weeks or months for correction.
A number of software companies have attempted to provide products that
address these semiconductor design challenges, but we believe these products
fail to meet fully the needs of next generation networking equipment and other
high performance electronics manufacturers. Products in these categories have
exhibited a variety of shortcomings in addressing FPGA, ASIC and SoC design
requirements. They have proven to be too narrow in scope, limited in terms of
functionality by not being able to process a variety of FPGA components or
large designs, difficult and costly to use or some combination of the above.
Many existing logic synthesis software products do not meet users' needs,
because they:
. fail to achieve the user's performance and capacity requirements or to do
so within the allotted design time;
. were originally intended for ASICs and have been adapted for FPGAs, and,
as a result, they cannot exploit fully the features of a particular FPGA;
. have lengthy processing times that either impair the electronic product
designers' ability to meet short time to market requirements or limit the
analysis of alternative designs such that performance goals may suffer
due to these constraints;
. require a lengthy training period before a designer can use them
productively, and therefore, equipment manufacturers must allocate a
substantial portion of their design budgets to training for skills which
are not otherwise valuable to their businesses;
. fail to incorporate features that support collaborative design of
complex, large FPGAs, which results in designers being unable to exploit
the benefits of those FPGAs; or
. need responsive and skilled after purchase user support, without which a
design may fall behind schedule or be rejected due to the risk that the
semiconductor will not function as required.
Many existing ASIC and SoC verification software products do not meet the
users' needs, because they:
. suffer from weaknesses, such as the inability to test large designs at
once due to size and operating speed limitations, that may lead equipment
manufactures to avoid large and complex semiconductor designs due to the
risk that the finished product will not meet functional or performance
specifications; or
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. require lengthy processing times that impair rapid time to market and do
not permit comprehensive software verification prior to the availability
of the ASIC, either of which increases the likelihood that the ASIC will
have to be redesigned before it can be produced in volume.
Many existing ASIC and SoC emulation and prototyping products used for
verification do not meet users' needs because they:
. operate at reduced speeds necessitating the development of complex
connections to other system components;
. require a lengthy training period before a designer can use them
productively because the designer must have a detailed and extensive
understanding of the underlying equipment, which is irrelevant to the
specific design being tested, in order to configure the verification
equipment for a specific design;
. do not result in prototypes that could be duplicated and distributed to
geographically dispersed design team members, who are each focusing on
different aspects of the end product;
. require substantial responsive and skilled after purchase user support,
without which a design may fall behind schedule or be rejected due to the
risk that the semiconductor will not function as required; or
. prevent timely design completion due to lack of available upgrades and
maintenance releases.
Equipment manufacturers and electronic product designers increasingly seek
semiconductor design solutions that provide rapid productivity and highly
optimized results. High productivity and highly optimized results enable the
electronic product designer to exploit fully the capacity of the semiconductor.
They also seek vendors that provide responsive customer support that will not
stall the design process. These semiconductor design products should not
require next generation networking and other equipment manufacturers to train
their electronic product designers to be qualified as experienced semiconductor
device designers as well, unless those skills are otherwise useful to the
equipment manufacturer. A verification product should enable the designer to
test the semiconductor under realistic conditions by prototyping the entire
design at once and enabling the prototype to run at the actual speed required
for the finished semiconductor.
Our Solution
We are a leading provider of software products that enable the rapid and
effective design and verification of FPGAs, ASICs and SoCs for use in next
generation networking equipment. Our software solutions are also applied in the
design of other communications systems, computers, industrial and medical
electronics, as well as consumer products and military and aerospace systems.
Our software solutions improve performance and shorten development times for
complex FPGAs, ASICs and SoCs by simplifying, improving and automating key
logic synthesis, physical synthesis and verification functions. Our products
combine a number of sophisticated mathematical algorithms, electrical
engineering techniques and advanced software operations.
A key feature of our products is their ability to generate and display
concurrently three views of a semiconductor design--the textual design
description, a highly abstract graphical representation of the design
description and an optimized, detailed diagram showing the various elements of
the semiconductor design. As the designer changes the textual description, the
changes are automatically reflected in the other two views. These alternate
representations aid the designer to manipulate and optimize the design and
diagnose problems. Our software products also provide the following features
and benefits to our customers and their electronic product designers:
Design goal achievement. Our products enable designers to design products
quickly and intuitively that meet or exceed their semiconductor performance and
capacity utilization goals. Efficient and cost-effective manufacturing of a
semiconductor depends on full utilization of the semiconductor's capacity.
Users specify design constrains through our graphical user interface and then
use our products to automatically process the design to achieve function,
performance and capacity goals. The complex optimization operations that our
products perform employ the most advanced features of the target semiconductor
and result in a highly optimized design that improves performance of the
electronic equipment. As a result, our solutions may also enable designers to
use less costly semiconductors to achieve the same performance goals, thus
reducing costs.
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Accelerated time to market. Electronic product designers require time
efficient solutions. Our products optimize small designs in seconds and large
designs in hours or even minutes, significantly faster than alternative
software. Reduced run time significantly shortens time to market because logic
synthesis, physical synthesis and verification are typically performed
repeatedly during the design process. In addition, our products allow designers
to select an optimal design from various design possibilities in the same
amount of time that alternative software would require to evaluate a single
solution.
Ease of use. Our products are designed to be easy to install, learn and use.
The user enters only easily acquired and understood information that is
specific to the design. Our products employ complex algorithms, but their
sophistication makes the designers' work simpler. Both experienced and novice
users value our products because they provide highly optimized designs that
require a minimum level of effort as compared with conventional approaches. We
believe our solutions' ease of use and graphical representations make them
accessible to a larger group of designers without sacrificing quality of
results or achievement of design goals.
Capacity for complex designs. We believe our products provide significant
advantages for designing FPGAs, ASICs and SoCs that contain large numbers of
transistors. Our products can implement designs for the largest available FPGAs
by incorporating algorithms that increase run time linearly with design size,
as opposed to nonlinearly with alternative software products. Synplify Pro, one
of our new products, enhances electronic product designer productivity, as well
as the performance for complex designs. Amplify Physical Optimizer, one of our
new products, is intended specifically for large FPGA designs and incorporates
specialized features for optimizing these designs that can improve performance
up to 35% for large FPGAs. Certify, our ASIC and SoC verification product,
includes features that enable the designer to validate large designs using high
speed prototypes. Without these prototypes, ASIC and SoC designers may elect
not to undertake a large design because it cannot be adequately tested.
Comprehensive customer support. Because of the complex nature of our
customers' design activities, support services are an integral part of our
solution. We emphasize rapid resolution of customer questions by staffing our
customer support operation with knowledgeable engineers. These engineers, who
have substantial design experience with the entire design flow, answer incoming
support requests from our customers. We have provided our customer service
organization with sufficient resources so that our staff can address our goal
of responding to customer problems within 24 hours. We also make available
through our web site information regarding support solutions, problem
submission and problem status.
Our Strategy
Our objective is to extend our position as a leading software provider of
logic synthesis, physical synthesis and verification products for FPGAs, ASICs
and SoCs for use by next generation networking equipment manufacturers. To
achieve these goals we intend to:
Continue to invest in research, development and product innovation. We
intend to continue to introduce new products addressing different design tasks
in the general areas of logic synthesis, physical synthesis and verification
while continuing to improve our existing products. We expect to accomplish this
through substantial research and development investments while using our core
technology platform to drive development. We intend to continue to improve our
core optimization algorithms that underlie all of our products and to provide
timely support for new FPGA products as they are introduced. We intend to
extend our physical synthesis product line to include greater integration with
our ASIC verification product line and with design software from FPGA
semiconductor vendors and will enhance our ASIC verification product line with
more automation, features, options and third party software integration. We
also intend to produce ASIC products including an ASIC synthesis product
targeted at existing Synplify customers, a large percentage of whom also design
ASICs.
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Focus on FPGAs and next generation networking and communications
equipment. We believe that expanding functional capacity, increased performance
expectations and time to market pressures are accelerating demand for FPGAs.
These increasingly sophisticated FPGAs will require innovative design software
to cope with more complex designs. We also believe that the FPGAs will increase
in importance and breadth for use in next generation networking and
communications equipment due to improvements in FPGA performance and time to
market pressures. We intend to maintain a strong focus on the next generation
networking and communications uses for FPGAs and to provide products that
facilitate the rapid design of high quality semiconductors. We have assembled
what we believe to be the largest engineering team focused on FPGA synthesis
products, and we intend to continue to expand this team to increase our focus
and extend our leadership in this area.
Leverage and expand strategic relationships. We have developed marketing and
engineering relationships with Altera Corporation, Lucent Technologies Inc. and
Xilinx Inc., three leading manufacturers of FPGAs. In addition, we have
original equipment manufacturer agreements with Actel Corporation, Lattice
Semiconductor Corporation and QuickLogic Corporation, which also manufacture
and supply FPGAs. We have developed an extensive relationship with Cadence
Design Systems, Inc. that includes reciprocal original equipment manufacturing
arrangements and joint marketing and sales efforts. We intend to continue and
to expand our strategic relationships to enhance the full value, flexibility
and depth of our product offerings.
Continue to emphasize customer success. We believe that the further growth
and quality of our customer support organization will continue to facilitate
our customers' success and build brand loyalty. Our skilled user support
organization contributed to the high renewal rate of our maintenance services
in 1999 and 2000. We intend to establish support centers outside North America
that will be staffed by similarly qualified individuals who will provide
services to our customers in those areas. As we acquire more customers and they
purchase annual maintenance services from us, we intend to continue to recruit
persons with substantial engineering experience so as to increase the size of
our user support organization. We believe the quality and experience of our
user support staff will continue to strengthen our competitive advantage. We
intend to continue to encourage prospective customers to evaluate and compare
our customer support.
Increase sales to existing customer base. An increasing portion of our
revenue comes from the sale of additional licenses to our current customers for
our existing and newly developed products. We intend to continue to target our
customers producing next generation networking equipment. In addition, we will
continue to market our products to our other existing customers, which produce
many types of electronics, consumer and military and aerospace applications.
Because of our large user base and the diverse nature of their businesses, we
believe that selling new products to our current customers represents a
significant opportunity for our company.
Expand global distribution channels. Presently, we sell our products
domestically through our direct, outside sales force and our telesales
organization. In order to further expand domestic sales coverage, we also have
a sales and marketing relationship with semiconductor distributor Insight
Electronics LLC. We believe that markets outside North America offer a
significant growth opportunity for us as equipment designers in those markets
more widely adopt design techniques for semiconductors that include logic
synthesis, physical synthesis and verification software products. We also
intend to strengthen our direct sales presence and engage distributors in key
international markets to maximize sales coverage and user support.
Products and Customer Support
We develop and market software products for the rapid and effective design
and verification of FPGAs, ASICs and SoCs. Our products facilitate the creation
of high performance designs and enable the fast time to market required by our
customers in the next generation networking and communications equipment
market. Our logic synthesis, physical synthesis and verification products
enable electronic product designers to reduce
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overall design time. We have developed and will continue to improve our
comprehensive support organization and expect to provide an increasing level of
support to our customers.
Synplify and Synplify Pro
In 1995, we introduced our first product, Synplify, a logic synthesis
product which enables customers to implement their designs in FPGAs quickly and
easily. In May 2000, we launched Synplify Pro, an advanced FPGA logic synthesis
product incorporating improved productivity features and offering enhanced
results. To perform logic synthesis, Synplify and Synplify Pro employ
proprietary optimization algorithms, which we call Behavior Extracting
Synthesis Technology. Synplify and Synplify Pro take advantage of any
specialized features provided by the FPGA manufacturers that improve
performance for a particular design. Logic synthesis software products
transform a high level design specification into a format comprised of logic
elements and wires interconnecting those elements that is ready for
implementation in a semiconductor. Logic synthesis is a primary determinant of
FPGA, ASIC or SoC design performance. As a result, logic synthesis has a
significant impact on the overall performance of the electronic system in which
the FPGA, ASIC or SoC resides. We believe that Synplify and Synplify Pro have
the industry's highest performance results on the basis of speed and capacity
utilization of the resulting FPGA. In addition, Synplify Pro automatically
identifies and restructures certain types of control circuits to achieve better
performance.
Because logic synthesis is performed multiple times during the design
process, the less time synthesis requires, the more quickly the engineer can
complete the design process. We believe that Synplify and Synplify Pro have the
industry's fastest synthesis run times. We employ algorithms that scale
linearly in run time with the size of the design. Small designs can be
synthesized in seconds and designs for the newest, largest FPGAs can be
synthesized in hours or even minutes. Synplify and Synplify Pro require only
the input of readily available design data. This information is entered via a
simple to use graphical user interface, which allows designers to specify all
design constrains in a single location quickly and intuitively. We believe that
our experienced customers embraced Synplify because it does not sacrifice
performance in order to achieve ease of use and short design times.
HDL Analyst
In 1997, we introduced HDL Analyst, a software product that is available as
an option to Synplify and is incorporated into most of our other products. A
key feature of HDL Analyst is its ability to generate and display concurrently
three views of a semiconductor design--the textual design description, a highly
abstract graphical representation of the design description and an optimized,
detailed diagram showing the various elements of the semiconductor design. As
the designer changes the textual description, the changes are automatically
reflected in the other two views. HDL Analyst enables designers to quickly
identify performance bottlenecks and identify other opportunities for
improvement.
Certify
In 1999, we introduced Certify, a software product for verification of ASICs
and SoCs using prototypes consisting of multiple FPGAs. Certify enables design
teams to create hardware prototypes early in the design process so that design
changes are easier and less costly. It is also important for verifying that the
final system will work as specified, will work with system level software and
will meet customer requirements. Customers who use Certify to define their
prototypes can begin system integration, software verification, chip
verification and system verification earlier than other approaches to
functional verification. Certify processes multimillion gate designs in a
single pass without the complex scripts commonly required by ASIC or SoC
synthesis products.
Certify is the first commercially available verification product
incorporating synthesis and that enables the user to create prototypes directly
from the user's textual design specification. We believe Certify is easier to
use than alternative solutions. Being able to operate the prototype at or near
the speed of the final product is
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very important for ASIC and SoC verification, particularly for next generation
networking and multimedia applications. Other available approaches, such as
logic simulation software, emulation systems or reconfigurable prototyping
systems, cannot run at a sufficient performance level for many applications,
such as mobile telephony, optical switching or streaming video in real time.
Certify enables designers to create prototypes that operate at or near the
speed of the final product and at substantially higher frequencies than other
available approaches by using our proprietary embedded synthesis technology
that optimizes the final prototype performance. Certify achieves high
performance for a multi-FPGA semiconductor prototype by optimizing all FPGAs in
the prototype simultaneously.
Amplify Physical Optimizer
In March 2000, we introduced Amplify Physical Optimizer, a software product
specifically created for designing large, complex FPGAs. The key innovation and
differentiating feature of Amplify Physical Optimizer is the method by which it
uses and improves physical implementation information provided by the designer
during the synthesis process to produce a faster semiconductor. We believe that
Amplify Physical Optimizer is the industry's first commercially available
physical synthesis product for FPGA design. The user provides this physical
implementation information through a graphical interface, and Amplify Physical
Optimizer utilizes this information to improve the design performance up to
35%.
We believe Amplify Physical Optimizer improves time to market. Without
physical optimizations, users must undertake numerous time consuming iterations
of design, constraint and software option changes in hopes of creating a design
that has the desired performance and functionality. Our goal is to enable
designers to use Amplify Physical Optimizer to achieve successful design
specification in much less time.
FPGA components are sold in performance grades. An FPGA offering marginally
higher performance may cost substantially more than the next lower grade.
Amplify Physical Optimizer assists designers to use less expensive components
to meet the same design requirements.
As design sizes increase, there is a trend toward design of FPGAs by groups
in which portions of the design are allocated to individual members. When the
design is assembled, a performance bottleneck may result if the independently
designed portions of the semiconductor do not operate smoothly together.
Amplify Physical Optimizer has features that assist a group of designers to
collaborate on a single, large FPGA design. We believe these features result in
collaborative designs that achieve higher performance than would otherwise be
possible.
Customer support
Our products are designed to be employed quickly and effectively by our
customers and to minimize the level of support from us for the designer to be
productive. Our customers use our products along with design software from
semiconductor manufacturers and from other third party design software
developers. The overall semiconductor design process is complex, and our
customers may seek assistance with various aspects of the semiconductor design
process from us. We believe that a high level of customer service and support
of their activities is critical to the success of our business. We have
developed and expect to continue to improve our comprehensive service and
support organization to manage customer accounts. We provide support for our
products and services primarily from our Sunnyvale, California and Bangalore,
India locations. We plan to expand existing and establish additional service
and support sites outside of the United States to support customers in those
markets.
We provide technical support to our customers through maintenance and
support services. The first year of maintenance and support is generally sold
when the customer purchases a product license. Thereafter, customers may
annually elect to renew maintenance. In 2000, a substantial majority of our
customers that were receiving maintenance elected to renew their maintenance
with us. We price our maintenance service on a per license basis of 20% of the
list license fee. Maintenance service provides us with a valuable, ongoing
revenue stream.
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We believe that customers will continue to renew maintenance because the
rate of innovation in the FPGA industry is high, and equipment manufacturers
expect us to support the latest components as soon as they are available.
Customers paying maintenance receive software updates for new FPGA components
when we make these updates available. In the past, we have issued at least two
new updates to our products per year. These frequent releases typically include
support for new components and enable our customers to optimize their designs
or create prototypes using those components. We work closely with leading FPGA
manufacturers to incorporate support for new components as quickly as possible.
Our service and support organization assists customers with product
installation and configuration. However, our service and support organization
devotes a majority of its efforts to assisting customers to resolve complicated
design and software questions that arise from the customers' complex design
tasks. We generally respond to customer support requests within 24 hours.
Effective execution of these tasks requires highly skilled engineers familiar
with our customers' design tasks as well as familiarity with third party
products that may be used by the customer in conjunction with out products. Our
support staff consists of engineers with substantial design experience. We
generally provide our support via electronic mail, our web site, facsimile and
telephone.
Our software solutions enable the rapid development and effective design of
FPGAs, ASICs, and SoCs, for use in next generation networking and other
electronic equipment. We have sold our products to over 1,400 corporations,
governmental agencies and other organizations worldwide. The following lists,
in alphabetical order, our top 20 end-user customers based on the dollar value
of product orders in the year ended December 31, 2000:
. Agilent Technologies . Lucent Technologies, Inc.
. Alcatel Business Systems . Marconi
. Cadence Design Systems, Inc. . Memec Design Services
. Caspian Networks, Inc. . Motorola, Inc.
. Cisco Systems, Inc. . NEC Corporation
. Compaq Computer Corporation . Nortel Networks Corporation
. Department of Defense . Northrop Grumman Corporation
. Intel Corporation . Philips Semiconductor
. LM Ericsson . Siemens AG
. Lockheed Martin . Teradyne, Inc.
Our customers often buy licenses for a single location, department or
division, and then, based upon the initial success of the products, later
expand their use of our products into other parts of their organizations. We
believe we can sell our existing products more extensively within our existing
customer sites and sell them new products as we expand our product line. We
will continue to pursue enterprise wide sales as appropriate. In 2000 and 1999,
no single customer comprised more than 10% of our revenue. In 1998, Pacific
Design, Inc., our Japanese distributor, represented 11% of our revenue, and
Nortel Networks Corporation represented 12% of our revenue.
Marketing and Sales
Marketing
We focus our marketing efforts to create awareness for our products and
generate leads for our sales organization. Our strategy is to distinguish our
products by their high level of design performance, ease of use and time to
market advantages. We employ a wide variety of communication channels to inform
customers and potential customers about our products. These channels include
our web site, print and web advertising, public relations, web based seminars,
live seminars, trade shows and electronic mail notification to customers about
new product releases.
10
Direct sales
We employ a multi-channel approach to sell our products. We license our
software products primarily through our direct sales organization, as well as
distributors, resellers and other strategic partners. Our direct sales efforts
target customers who design semiconductors for next generation networking
equipment.
As of December 31, 2000, our direct sales staff consisted of 65 employees
based in 15 sales offices. Direct sales accounted for approximately 79% of
total revenue in 2000, 72% of total revenue in 1999 and 60% of total revenue in
1998. Our sales teams generally include a sales manager, applications engineer
and telesales representative for each territory. A majority of our direct sales
contacts obtain an evaluation trial of our product from our web site. A
telesales representative prequalifies the potential customer. Our sales
managers target middle management during the sales cycle, while our application
engineer focuses on the end user to demonstrate that our products address the
customer's specific needs. The direct sales team also relies heavily on
distribution and strategic partners for demand creation and leads. Our typical
sales cycle varies by product from two weeks to several months.
We currently have domestic direct sales offices in or near Sunnyvale,
California; San Diego, California; Newport Beach, California; Chicago,
Illinois; Bel Air, Maryland; Andover, Massachusetts; Durham, North Carolina;
Austin, Texas; Beaverton, Oregon; and Redmond, Washington. We also have
international direct sales offices in Bracknell, England; Aix-en-Provence,
France; Munich, Germany; Bangalore, India; Netanya, Israel; and Tokyo, Japan.
Indirect sales
In addition to our direct sales strategy, we have established indirect sales
channels through distributors and other resellers. Our relationships with
distributors play a critical role in extending our reach to more customers.
Distribution is key in either assisting our direct sales staff or by being our
sole sales and support representatives in territories that include portions of
Europe and Asia. Revenue from distribution was approximately 14% of total
revenue in 2000, 20% of total revenue in 1999 and 31% of total revenue in 1998.
Outside North America, we have historically relied heavily on our indirect
sales channel. We have established a network of resellers and distributors in
Europe and Asia. Our international distributors and other resellers typically
perform marketing, sales and technical support functions in their country or
region. Each one may distribute directly to the customer, via other resellers
or through a mixture of both channels. We actively train our international
distributors in both product and sales methods.
Strategic Relationships
Our strategic partners include FPGA manufacturers, FPGA distributors and
semiconductor design software companies, which provide information that assists
us with the successful development and distribution of our software solutions.
FPGA manufacturers. Our FPGA manufacturer partners work closely with us
before each product release to ensure that our products perform optimally with
their FPGAs. We rely on these FPGA manufacturers to provide us advance
information and answer detailed questions about their FPGA components and
software. Our FPGA partners currently include Actel, Altera, Atmel Corp.,
Cypress Semiconductor Corp., Lattice, Lucent, QuickLogic and Xilinx. Actel,
Lattice and QuickLogic also resell a limited feature version of Synplify. These
reselling relationships provide a strong endorsement of our products, expand
our sales channels and serve to introduce our products to a large number of
potential customers. These FPGA manufacturers generated approximately 5% of our
total revenue in 2000 and 1999 and 6% of our total revenue in 1998.
FPGA distributors. Insight Electronics refers customers to us and we conduct
joint marketing activities with them. This distributor is of high strategic
value to us because it also distributes the most widely used FPGAs from Xilinx.
11
Semiconductor design software companies. We work with semiconductor design
software company partners to integrate our complementary products with theirs
to create a more complete, easier to use set of design solutions for the
benefit of our mutual customers. Our semiconductor design software company
partners include those whose products perform functions such as design entry,
simulation, analysis, hardware prototyping and simulation acceleration
hardware. We have three agreements with Cadence, under which Cadence resells
our Synplify, HDL Analyst and Certify products in combination with some of its
products. We resell versions of Cadence's Affirma simulators bundled with our
products. We also have reselling agreements in place with Aldec Corp. and
TransLogic Corp. under which we resell their simulation and design entry
products, respectively.
Technology and Research and Development
Technology
Our products are used to design FPGAs, ASICs and SoCs, and we believe our
products are easier to use and produce superior results more rapidly than
alternative solutions. In addition, our core technology platform enables us to
produce innovative products quickly. These product and development
characteristics are made possible by our proprietary technology. Selected
features of our technology include:
Behavior Extracting Synthesis Technology. Our products are designed with our
proprietary technology to recognize and locate common circuit building blocks
within designs and maintain high level representations of these blocks
throughout the synthesis process. Other synthesis products use circuit
representations that maintain detailed level representations of the design, but
lose important information. By maintaining behavioral information that
describes a semiconductor's function throughout synthesis, we believe our
synthesis products make better overall optimizations, which result in better
circuit performance.
Physical synthesis innovations. Achieving superior performance in large
FPGAs requires solving specialized problems not encountered in smaller FPGAs.
We have invented and submitted applications for patents related to algorithms
that solve many of these problems. These algorithms involve combining synthesis
with processes that are normally applied later in the semiconductor design
process. This combination is termed physical synthesis, and we believe that we
are the first to offer products based on this technology to FPGA designers.
Fast, memory efficient algorithms. Long run times are a commonly encountered
barrier to processing large designs. Because synthesis is performed repeatedly
during the design process, fast run times are an important time to market
determinant. All of the algorithms employed in our products were carefully
selected and implemented for fast run times and efficient memory utilization.
These algorithms' run times increase linearly as design size increases, as
opposed to nonlinearly with other software products.
Embedded electrical engineering knowledge. Synthesis and optimization of
complex circuits is accomplished through a large collection of algorithms and
heuristics. For any given circuit, the application of these algorithms requires
many decisions including, for example, which algorithms to use and in what
order to apply them. Implementing a synthesis product is considerably easier if
the user is required to make these types of decisions. However, this places the
burden of understanding the effects of synthesis algorithms on the user and
results in a difficult to use product. Instead, we build products with a level
of automation for making these decisions by embedding a high degree of
electrical engineering knowledge in the products so that optimization decisions
are performed automatically.
Research and development
We believe that strong product development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications
and increasing the competitiveness of our product offerings. We have invested
significant time and resources in creating a structured process for undertaking
all product
12
development projects. This process involves key functional groups within our
company and is designed to provide a framework for defining and addressing the
steps required to bring product concepts and development projects to market
successfully. Our product development strategy emphasizes rapid innovation and
product releases.
We have actively recruited key computer engineers and software developers
with expertise and degrees in computer science, electrical engineering and
other engineering disciplines. As of December 31, 2000, we had 105 employees
engaged in research and development activities and related customer support
services. Our research and development expenses were $13.3 million in 2000,
$8.0 million in 1999 and $4.0 million in 1998.
Intellectual Property
Our software products rely on our internally developed intellectual property
and other proprietary rights. We rely primarily on a combination of patent,
copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property and other
proprietary rights. However, we believe that these measures afford only limited
protection. We have eight patent applications pending before the United States
Patent and Trademark Office, one of which was granted subsequent to December
31, 2000. We license our software products primarily under shrink wrap licenses
that are included as part of the product packaging. Shrink wrap licenses are
not negotiated with or signed by individual customers, and purport to take
effect upon the opening of the product package or use of the software license
key. The legal enforceability of shrink wrap licenses is uncertain in many
jurisdictions. We also generally enter into confidentiality agreements with our
employees and technical consultants. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use information that we regard as proprietary. Policing
unauthorized use of our products is difficult and we are unable to determine
the extent to which piracy of our software products exists. In addition, the
laws of some foreign countries do not protect our proprietary rights as fully
as do the laws of the United States.
We are not aware that our products employ technologies that infringe any
valid proprietary rights of third parties. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. From time to time third
parties have claimed that our products violate their proprietary rights but
none of these claims has resulted in litigation or material expense. Any
infringement claims, with or without merit, could:
. be time consuming to defend;
. result in costly litigation or damage awards;
. divert management's attention and resources;
. cause product shipment delays; or
. require us to enter into royalty or licensing agreements
These royalty or licensing agreements may not be available on terms
acceptable to us, if at all.
Government Regulation
Our success depends on the internet infrastructure equipment industry, which
in turn depends on increased use of the internet for e-commerce and other
commercial and personal activities. Laws and regulations have been proposed in
the United States and Europe to address privacy and security concerns related
to the collection and transmission of information over the internet. In the
United States, the Federal Trade Commission, or FTC, is considering regulations
that may require companies to:
. give adequate notice to consumers regarding information collection and
disclosure practices;
. provide consumers with the ability to have personal, identifying
information deleted from a company's databases;
13
. clearly identify affiliations or a lack thereof with third parties which
may collect information or sponsor activities on a company's website; and
. obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
Under the proposed FTC regulations, businesses that violate the regulations
could face monetary fines. At the international level, the European Union, or
EU, has adopted a directive that imposes restrictions on the collection and use
of personal data from individuals in EU member countries. This EU directive
could affect internet businesses elsewhere that have users in one or more EU
member countries.
The proposed FTC regulations, if adopted, or the EU directive, as adopted,
could adversely affect the ability of internet businesses to collect
demographic and personal information from users, which could have an adverse
effect on the ability of internet businesses to target product offering and
attract advertisers. Any of these developments could harm the results of
operation and financial condition of internet businesses and impair the growth
of the internet.
In addition to government regulations related to internet privacy concerns,
it is possible that any number of additional laws and regulations may be
adopted with respect to the internet covering issues such as obscenity, freedom
of expression, pricing, content and quality of products and services, copyright
and other intellectual property issues and taxation. As an example, a number of
proposals have been made at the federal and local level and by various foreign
governments to impose taxes on the sale of goods and services and other
internet activities. Recently, the U.S. Internet Tax Information Act was
enacted, which places a three-year moratorium on new state and local taxes on
internet commerce. However, the moratorium does not prevent the U.S. federal
government or foreign governments from adopting laws that impose taxes on
internet commerce. The passage of new laws or changes to existing laws intended
to address use of the internet could create uncertainty in the marketplace,
increase the cost of doing business on the internet, increase legal liabilities
from doing business on the internet or in some other manner have a negative
impact on internet commerce and substantially impair its growth. Since our
customers supply the semiconductor equipment to build and operate internet
networks, if use of the internet decreases, our customers may see a decreased
demand for their products. In that event, our customers may purchase fewer
licenses for our products, which would cause our license and maintenance
revenue to fall.
Competition
We compete in markets that are intensely competitive and rapidly evolving.
We face competition primarily from semiconductor design software companies that
provide software suites to perform a variety of design functions for all types
of semiconductors. We have experienced and expect to continue to experience
increased competition from current and potential competitors, many of which
have significantly greater financial, technical, marketing and other resources.
Companies offering competitive products vary in scope and breadth. Our
competitors include:
. providers of single solution products for logic synthesis, simulation and
graphic design entry, such as Mentor Graphics Corporation, through its
Exemplar Logic division;
. programmable semiconductor manufacturers, such as Altera, Cypress,
Lattice and Xilinx;
. providers of general purpose synthesis and compiler software such as
Cadence, Mentor Graphics and Synopsys, Inc.
. providers of software design suites that include synthesis products such
as Innoveda, Inc. and Protel International Ltd.; and
. providers of verification software and hardware products such as Aptix
Corp., Cadence, IKOS Systems, Inc., Mentor Graphics and Synopsys.
14
While all of these companies compete with us, some also market or sell our
products.
We believe the principal factors that will draw end customers to a
semiconductor design software product, including logic synthesis, physical
synthesis and verification products, include:
. high performance and quality;
. short run time;
. ease of use;
. depth and breadth of product features;
. high quality customer support;
. frequency of product updates;
. conformance to industry standards; and
. price.
We believe that we compete favorably on these factors. However, we expect
competition in the semiconductor design software market for FPGAs, ASICs and
SoCs to increase significantly as new companies enter the market and current
competitors expand their product lines and services. Many of these potential
competitors are likely to enjoy substantial competitive advantages, including
greater resources that can be devoted to the development, promotion and sale of
their products. In addition, these potential competitors may have more
established sales channels, greater software development experience and/or
greater name recognition.
Employees
As of December 31, 2000, we had 210 employees, of whom 105 were engaged in
research and development and related customer support services, 65 in sales, 16
in marketing and 24 in finance, administration and operations. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
15
Executive Officers
Our officers and their ages as of December 31, 2000 are as follows:
Name Age Position
- ---- --- --------
Chief Executive Officer, President and
Bernard Aronson............... 70 Director
Chief Technology Officer, Vice President and
Kenneth S. McElvain........... 40 Director
Alisa Yaffa................... 36 Chairman of the Board of Directors, Vice
President of Intellectual Property and
Secretary
Vice President of Finance and Chief Financial
Douglas S. Miller............. 43 Officer
Robert J. Erickson............ 46 Vice President of Engineering
Andrew Haines................. 50 Vice President of Marketing
Gary Meyers................... 36 Vice President of Worldwide Sales
Bernard Aronson has served as our Chief Executive Officer, President and a
Director since July 1997. From February to July, 1997, Mr. Aronson served as
senior vice president and co-general manager of the EPIC Technology Group at
Synopsys, a semiconductor design software company. From July 1991 to February
1997, Mr. Aronson served as president of EPIC Design Technology, Inc., a
semiconductor design software company, and also served as a director of EPIC
from March 1992 to February 1997, until its merger with Synopsys. From March
1990 to August 1991, Mr. Aronson served as executive vice president of Zoran
Corporation, a semiconductor company. From 1987 to January 1990, he served as
president of ICI Array Technology, Inc., a contract assembly company. From 1976
to 1987, Mr. Aronson served as president of Pico Design, Inc., a semiconductor
chip design company that he founded and which became a wholly owned subsidiary
of Motorola in 1979. Mr. Aronson holds a Bachelor of Science degree in
Electrical Engineering from the City University of New York.
Kenneth S. McElvain, one of our co-founders, has served as our Chief
Technology Officer, Vice President and Director since inception. Mr. McElvain
also served as our President from our inception to January 1996, and our Chief
Executive Officer from January 1996 to July 1997. From March 1990 to January
1994, Mr. McElvain was a manager of the logic and timing optimization group and
chief architect of the AutoLogic logic synthesis product at Mentor Graphics.
From April 1984 to March 1990, Mr. McElvain was a senior member of technical
staff and the originator of the AutoLogic logic synthesis product at Silicon
Compilers, Inc., an intellectual property and semiconductor design software
company. From July 1980 to April 1984, Mr. McElvain served as a mainframe
designer at Hewlett Packard Company. Mr. McElvain holds a Bachelor of Arts
degree in Mathematics and a Bachelor of Science degree in Computer Science from
Washington State University.
Alisa Yaffa, one of our co-founders, has served as our Chairman of the Board
of Directors, Vice President of Intellectual Property and Secretary since March
1997, October 1998 and our inception, respectively. Ms. Yaffa also served as
our Chief Executive Officer from our inception to January 1996 and our
President from January 1996 to July 1997. From inception to October 1998, Ms.
Yaffa served as Chief Financial Officer of our company. Prior to joining our
company, Ms. Yaffa served in various technical and marketing roles at Cadence
Design Systems, Inc., a semiconductor design company, Mentor Graphics, EDA
Systems, Inc., a design framework software company, and VLSI Technology, Inc.,
a semiconductor manufacturer that has subsequently been acquired by Philips
Semiconductor. Ms. Yaffa holds a Bachelor of Arts degree in Applied Mathematics
and Computer Science from University of California at Berkeley.
Douglas S. Miller has served as our Vice President of Finance and Chief
Financial Officer since October 1998. From June 1998 to September 1998, Mr.
Miller was a self-employed financial consultant. From April 1997 to May 1998,
Mr. Miller served as Vice President and Chief Financial Officer of 3Dlabs, Inc.
a graphics
16
semiconductor company. From October 1991 to April 1997, Mr. Miller served as a
partner at Ernst & Young LLP, and from July 1985 to September 1991, Mr. Miller
served as a manager at Ernst & Young LLP, a professional services organization.
Mr. Miller is a certified public accountant. He holds a Bachelor of Science
degree in Accounting from Santa Clara University.
Robert J. Erickson has served as our Vice President of Engineering since
April 1998. From June 1997 to April 1998, Mr. Erickson was a principal of
Vermilion DA, a semiconductor design software consulting firm. From May 1984 to
June 1997, Mr. Erickson served in various positions including a director of
engineering at Mentor Graphics. Mr. Erickson holds Bachelor of Arts degrees in
Physics and Electrical Engineering from Rice University and a Master of Science
degree in Electrical Engineering from Stanford University.
Andrew Haines has served as our Vice President of Marketing since November
1996. Prior to joining our company, Mr. Haines was active as president and
founder of Page Mill Marketing, Inc., a marketing consulting company from
February 1995 to November 1996. Previously, Mr. Haines acted as director of
marketing for Actel, an FPGA company from 1987 to 1993. Mr. Haines also held a
variety of marketing positions at VLSI Technology, Inc. and Intel Corporation.
Mr. Haines holds a Bachelor of Science degree in Physics from the University of
Wisconsin, Madison.
Gary Meyers has served as our Vice President of Worldwide Sales since
November 1999 and was Vice President of North American Sales from January 1999
to November 1999. Mr. Meyers joined Synplicity in January 1998 where he served
as Western Area Sales Manager until January 1999. From 1988 through 1997, Mr.
Meyers served in various senior sales and marketing roles at LSI Logic, a
semiconductor company, including from 1996 to 1997 as Director of Marketing of
the Communications Products Division, and from 1994 to 1996, as Major Account
Sales Manager. Mr. Meyers holds a Bachelor of Science degree in Electrical
Engineering from the University of Maryland and a Masters of Business
Administration degree from the University of California at Los Angeles.
ITEM 2. PROPERTIES
Our principal offices are located in a leased 34,200 square foot facility in
Sunnyvale, California and house the majority of our research and development
and related customer support services employees, as well as all marketing,
administration and finance employees. Our lease for the Sunnyvale facility
expires in September 2002. In addition, we lease a 3,900 square foot
development and support center in Bangalore, India, a 3,000 square foot sales
office in Andover, Massachusetts, a 3,000 square foot facility in Tokyo, Japan
and a 1,300 square foot sales office in Austin, Texas. We also maintain leased
development or sales offices, each of 1,000 square feet or less, in or near
Newport Beach and San Diego, California; Austin, Texas; Chicago, Illinois;
Durham, North Carolina; Redmond, Washington; Beaverton, Oregon; Bel Air,
Maryland; Bracknell, United Kingdom; Munich, Germany; Aix-en-Provence and
Montpelier, France, and Netanya, Israel. Other than our Andover, Massachusetts,
Tokyo, Japan, Austin, Texas and Montpelier, France offices, none of the leases
for our development or sales offices is more than 12 months in duration. We
expect that our current leased facilities will be substantially sufficient for
our needs for 2001, however, we expect to expand certain existing sales offices
or establish new ones during 2001.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF SYNPLICITY COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "SYNP" since October 12, 2000. The following table sets forth for the
period indicated the high and low sale prices for the common stock, as reported
by the Nasdaq National Market.
High Low
------ -----
Fiscal Year Ended December 31, 2000
Fourth Quarter (from October 12, 2000).................... $16.00 $8.00
On December 29, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $14.50 per share. As of February 27, 2001 there
were approximately 166 holders of record of our common stock.
SALES OF UNREGISTERED SECURITIES
From September 30, 2000 to December 31, 2000, we sold 132,245 shares of our
common stock to 26 of our employees and consultants for proceeds of
approximately $158,000 pursuant to Rule 701 under the Securities Act of 1933,
as amended.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future.
18
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes thereto. The
selected consolidated statement of operations data for the years ended December
31, 2000, 1999 and 1998, and the selected consolidated balance sheet data as of
December 31, 2000 and 1999, are derived from, and are qualified by reference
to, the audited consolidated financial statements included elsewhere in this
Annual Report on Form 10-K.
The selected consolidated statement of operations data for the years ended
December 31, 1997 and 1996 and the selected consolidated balance sheet data as
of December 31, 1998, 1997 and 1996 are derived from, and qualified by
reference to, audited consolidated financial statements that are not included
in this Annual Report on Form 10-K.
The historical results presented below are not necessarily indicative of
future results.
Years Ended December 31,
------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- ------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenue:
License......................... $25,006 $13,019 $ 8,373 $ 4,679 $1,594
Maintenance..................... 9,584 5,156 2,655 775 204
------- ------- ------- ------- ------
Total revenue................. 34,590 18,175 11,028 5,454 1,798
Cost of revenue:
Cost of license................. 246 239 148 97 43
Cost of maintenance............. 1,537 1,187 531 64 --
------- ------- ------- ------- ------
Total cost of revenue......... 1,783 1,426 679 161 43
------- ------- ------- ------- ------
Gross profit...................... 32,807 16,749 10,349 5,293 1,755
Operating expenses:
Research and development........ 13,286 8,018 4,031 1,054 323
Sales and marketing............. 18,293 12,903 8,317 3,970 1,167
General and administrative...... 3,570 2,586 1,620 788 287
Stock-based compensation........ 952 175 -- -- --
------- ------- ------- ------- ------
Total operating expenses...... 36,101 23,682 13,968 5,812 1,777
------- ------- ------- ------- ------
Loss from operations.............. (3,294) (6,933) (3,619) (519) (22)
Other income (expense), net....... 647 (7) (19) 47 9
------- ------- ------- ------- ------
Net loss.......................... $(2,647) $(6,940) $(3,638) $ (472) $ (13)
======= ======= ======= ======= ======
Basic and diluted net loss per
common share..................... $ (0.16) $ (0.52) $ (0.29) $ (0.04) --
======= ======= ======= ======= ======
Shares used in per share
calculation...................... 16,115 13,227 12,451 11,954 6,667
======= ======= ======= ======= ======
December 31,
------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- ------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-
term investments................. $36,535 $ 2,633 $ 1,193 $ 2,314 $2,093
Working capital (deficit)......... $30,652 $(2,363) $(1,273) $ 1,619 $2,042
Total assets...................... $51,963 $ 9,119 $ 6,509 $ 4,434 $2,570
Long term obligations, less
current portion.................. $ 196 $ 720 $ 2,343 $ 403 $ 125
Total shareholders' equity
(deficit)......................... $38,291 $ (734) $(1,660) $ 1,939 $2,065
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Factors Affecting Future Operating Results" and elsewhere in this Annual
Report on Form 10-K. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
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 under "Factors Affecting Future Operating
Results." 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, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this Annual Report on Form 10-K to conform
our prior statements to actual results.
Overview
We were founded in February 1994, and we released our first product,
Synplify, our FPGA logic synthesis software solution in 1995. In the second
quarter of 1997, we launched HDL Analyst, a complementary product to Synplify
that provides graphical representation and design analysis. In the first
quarter of 1999, we released Certify, our ASIC and SoC verification product. We
released Amplify Physical Optimizer, which we believe is the only physical
synthesis product for FPGAs, in March 2000 and Synplify Pro, an advanced FPGA
logic synthesis product, in May 2000. We began recognizing revenue from Amplify
Physical Optimizer and Synplify Pro in the second quarter of 2000.
Our revenue, which consists of license and maintenance revenue, was $34.6
million in 2000, $18.2 million in 1999 and $11.0 million in 1998. Historically,
we have generated the majority of our total revenue from licenses. However, as
a result of our growing installed customer base maintenance revenue has
increased as a percent of total revenue. We currently derive substantially all
of our total revenue from sales of a small number of products. Sales of our
Synplify, Synplify Pro and HDL Analyst products were approximately 83% of our
license revenue in 2000, approximately 93% of our license revenue in 1999 and
100% of our license revenue in 1998.
We generally sell our products directly through our sales force and
indirectly through channel partners that include international distributors,
resellers and FPGA manufacturers. Direct sales provide a majority of our total
sales and account for substantially all of our sales in North America. Direct
sales were approximately 79% of our total revenue in 2000, approximately 72% of
our total revenue in 1999 and approximately 60% of our total revenue in 1998.
We have recently invested in expanding our direct sales force in international
locations. Revenue attributable to sales outside North America accounted for
approximately 21% of our total revenue in 2000, 20% of our total revenue in
1999 and 19% of our total revenue in 1998. We anticipate that our operating
results will continue to depend to a lesser extent on a relatively high volume
of sales to a relatively small number of international distributors and other
channel partners. In addition, we plan to continue to expand our international
operations significantly. We anticipate that international revenue will
increase as a percent of total revenue in the future.
We sell perpetual licenses to use our software products and also sell
related maintenance services. For each sale, we defer the recognition of
revenue until a purchase order is received from the customer, delivery of
20
the product and license key has occurred, the fee is fixed or determinable,
collection of the fee is probable based on completed credit review procedures
and there are no remaining obligations by us. Once all of the above conditions
have been met, we recognize license revenue based upon the residual method
after all elements other than maintenance have been delivered as prescribed by
Statement of Position 98-9, Modification of SOP No. 97-2 with Respect to
Certain Transactions. Sales to international distributors are recognized by us
when the international distributor has resold the product to an end user.
A substantial majority of customers that license our products also purchase
maintenance annually, which we price at 20% of the list price of the license.
Customers purchasing maintenance receive unspecified product updates and
electronic, internet-based technical support and telephone support. We
recognize revenue from maintenance ratably over the maintenance period, which
is typically one year. In general, customers on maintenance receive product
updates that support new FPGA devices when we make these updates available for
the licensed product. We believe these product updates are the primary reason a
majority of our customers renew maintenance. We have also provided a limited
feature version of one of our products to certain FPGA manufacturers for
distribution to their customers. As these arrangements do not provide for a
renewal fee for the licensed software or maintenance services, we have
concluded that we do not have vendor specific objective evidence of fair value
of the licensed software or maintenance on these type of arrangements as they
are not priced or offered separately. As a result, license and maintenance
revenue is recognized ratably over the period of each arrangement.
Maintenance revenue comprised 28% of our total revenue in 2000, 28% of our
total revenue in 1999 and 24% of our total revenue in 1998. We expect
maintenance revenue to continue to represent a significant percent of total
revenue and to vary as a percent of total revenue based on the growth rate of
license revenue and the number of customers renewing annual maintenance. If
maintenance revenue increases as a percent of total revenue, our gross margin
as a percent of total revenue may decrease due to lower margins on maintenance
revenue resulting from incremental maintenance support costs. However, over the
next 12 months, we do not expect maintenance revenue as a percent of total
revenue to vary significantly.
Since our inception in 1994, we have incurred substantial costs to develop
our technology and products, to recruit and train personnel for our
engineering, sales and marketing and customer support departments and to
establish an administrative organization. As a result, we had an accumulated
deficit of $13.8 million as of December 31, 2000. We anticipate that our
operating expenses will increase substantially in the future as we fund
additional research and development projects, increase our sales and marketing
operations both domestically and internationally, develop new sales channels,
increase our customer support capabilities and improve our operational and
financial systems. Accordingly, we will need to generate higher revenue in the
future to achieve and maintain profitability.
We apply Statement of Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed ("SFAS
86"), to software technologies we develop internally. We include internal
development costs in research and development, and we expense those costs as
they are incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which, based
upon our development process, generally occurs upon the completion of a working
model. As the time period between the completion of a working model and the
general availability of our products has not been significant, we have not
capitalized any software development costs to date.
We recorded unearned stock based compensation on our balance sheet of $3.8
million in connection with stock option grants to our employees that were
granted between June 1, 1999 and September 30, 2000. We amortize this stock-
based compensation over the vesting period of the related options, which is
generally four years. During 2000 and 1999, we amortized $952,000 and $175,000
of stock compensation, respectively. The remaining deferred stock compensation
at December 31, 2000 is expected to be amortized as follows: $1 million for the
year ending December 31, 2001, $753,000 for the year ending December 31, 2002,
and $859,000 for the year ending December 31, 2003 and the balance thereafter.
The amount of stock-based compensation expense to be recorded in future periods
could decrease if options for which accrued but unvested compensation has been
recorded are forfeited.
21
As of December 31, 2000, we had approximately $8.9 million of federal and
$1.6 million of state net operating loss carryforwards for tax reporting
purposes available to offset future taxable income. These net operating loss
carryforwards expire beginning in 2012 and 2002, respectively. We have not
recognized any benefit from the future use of loss carryforwards for these
periods or for any other period since inception because of uncertainty
surrounding their realization. The amount of net operating losses that we can
utilize may be limited under tax regulations in circumstances including a
cumulative stock ownership change of more than 50% over a three year period.
In order to increase market share in international locations and better
serve our global customers, we plan to further expand our international
operations. We expect that this expansion will require a substantial investment
in personnel, facilities and operations, which tend to be more costly than
similar investments in domestic operations. As a result of these investments in
our international operations, we may experience an increase in cost of sales
and other operating expenses disproportionate to revenue from those operations.
Our sales are generally denominated in United States dollars; however, a
portion of our operating expenses in international locations is denominated in
local currencies. Historically, our exposure to foreign exchange fluctuations
has been minimal. As our international sales and operations expand, we
anticipate that our exposure to foreign currency fluctuations will increase.
Specifically, on January 1, 2001, we began direct sales to our customers in
Japan in yen and expect all such future sales will be denominated in yen.
We had 210 employees as of December 31, 2000, which represents a substantial
increase from 140 employees as of December 31, 1999. This rapid growth has
placed significant demands on our management and operational resources. In
order to manage our growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely basis.
Results of Operations
The following table sets forth the results of our operations expressed as a
percent of total revenue. Our historical operating results are not necessarily
indicative of the results for any future period.
Years Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenue:
License...................................... 72.3% 71.6% 75.9%
Maintenance.................................. 27.7 28.4 24.1
-------- -------- --------
Total revenue.............................. 100.0 100.0 100.0
Cost of revenue:
Cost of license.............................. 0.7 1.3 1.4
Cost of maintenance.......................... 4.5 6.5 4.8
-------- -------- --------
Total cost of revenue...................... 5.2 7.8 6.2
Gross margin................................... 94.8 92.2 93.8
Operating expenses:
Research and development..................... 38.4 44.1 36.5
Sales and marketing.......................... 52.9 71.0 75.4
General and administrative................... 10.3 14.3 14.7
Stock-based compensation..................... 2.8 1.0 --
-------- -------- --------
Total operating expenses................... 104.4 130.4 126.6
Loss from operations........................... (9.6) (38.2) (32.8)
Other income (expense), net.................... 1.9 -- (0.2)
-------- -------- --------
Net loss....................................... (7.7)% (38.2)% (33.0)%
======== ======== ========
22
Years Ended December 31, 2000 and 1999
Total revenue
Our total revenue increased by 90.3% to $34.6 million for 2000 from $18.2
million for 1999. These increases were primarily attributable to an increase in
sales to our existing customers resulting in substantial growth in license and
maintenance revenue, as well as an increase in our customer base. In 2000 and
1999, no distributor or end customer accounted for over 10% of our total
revenue.
License revenue. License revenue increased by 92.1% to $25.0 million for
2000 from $13.0 million for 1999. The increase in revenue was primarily
attributable to increased market acceptance of our Synplify, Synplify Pro and
HDL Analyst products, and to a lesser degree, the introduction of our Certify
product in 1999 and Amplify product in 2000. The increase also reflects the
results from a larger and more productive sales force.
Maintenance revenue. Our maintenance revenue increased by 85.9% to $9.6
million for 2000 from $5.2 million for 1999. The increase in maintenance
revenue was primarily attributable to the increase in license sales to new and
existing customers, in connection with which we generally sell one year of
maintenance support services, as well as an increase in revenue from customers
renewing maintenance support services.
Cost of revenue
Cost of license revenue. Cost of license revenue includes product packaging,
software documentation and other costs associated with shipping, as well as
royalties due from us to third parties. Our cost of license revenue increased
2.9% to $246,000 for 2000 from $239,000 for 1999. The increase in the cost of
license revenue in absolute dollars was due primarily to the increased volume
of unit shipments during the year. As a percent of license revenue, the cost of
license revenue decreased to 1.0% for 2000 from 1.8% for 1999. The decrease in
cost of license revenue as a percent of license revenue was primarily due to
efficiencies achieved on greater volume of product shipments.
Cost of maintenance revenue. Cost of maintenance revenue consists primarily
of personnel and other expenses related to providing maintenance support to our
customers. Our cost of maintenance revenue increased 29.5% to $1.5 million for
2000 from $1.2 million for 1999. The increase in cost of maintenance revenue in
absolute dollars was primarily attributable to increased hiring of customer
support personnel to provide improved levels of service to our growing customer
base. As a percent of maintenance revenue, the cost of maintenance revenue
decreased to 16.0% for 2000 from 23.0% for 1999. The decrease in the cost of
maintenance revenue as a percent of maintenance revenue was primarily due to
the increased volume of maintenance renewal in the latter period. We expect
that the absolute level of cost of maintenance revenue will grow in the next 12
months to support our growing base of domestic and international customers.
Operating expenses
Research and development. Our research and development expenses increased
65.7% to $13.3 million for 2000 from $8.0 million for 1999. The absolute dollar
increase in research and development expenses was primarily attributable to an
increase in the number of software engineers we employed for the enhancement of
existing products and the development of new products. As a percent of total
revenue, research and development expenses decreased from 44.1% for 1999 to
38.4% for 2000. This decrease in research and development expenses as a percent
of total revenue was primarily attributable to the increase in total revenue
for 2000.
Sales and marketing. Our sales and marketing expenses increased 41.8% to
$18.3 million for 2000 from $12.9 million for 1999. The absolute dollar
increase in sales and marketing expenses was primarily attributable to the
hiring of additional sales and marketing personnel, increases in commissions
due to increased sales and the expansion of our sales offices, particularly in
Europe. As a percent of total revenue, sales and marketing expenses decreased
to 52.9% for 2000 from 71.0% for 1999. The decrease in sales and marketing
expenses as a percent of total revenue was primarily attributable to the
increase in total revenue for 2000.
23
General and administrative. Our general and administrative expenses
increased 38.1% to $3.6 million for 2000 from $2.6 million for 1999. The
absolute dollar level increase in general and administrative expenses was
primarily attributable to the hiring of additional finance and operations
personnel, as well as increased legal, accounting and other consulting fees. As
a percent of total revenue, general and administrative expenses decreased to
10.3% for 2000 from 14.2% for 1999. The decrease in general and administrative
expenses as a percent of total revenue was primarily attributable to the
increase in total revenue for 2000.
Stock-based compensation. Stock-based compensation expense was $952,000 for
the year ended December 31, 2000 and $175,000 for the year ended December 31,
1999. This compensation for 2000 related to the following: cost of maintenance
and research and development expenses of $492,000, and sales and marketing and
general and administrative expenses of $460,000. This compensation for 1999
related to the following: cost of maintenance and research and development
expenses of $118,000, and sales and marketing and general and administrative
expenses of $57,000.
Other income (expense), net
Our other income (expense), net increased to other income of $647,000 for
2000 from other expense of $7,000 for 1999, primarily as a result of increased
interest income on higher levels of cash, cash equivalent and investment
balances.
Years Ended December 31, 1999 and 1998
Total revenue
Our total revenue increased by 64.8% to $18.2 million for 1999 from $11.0
million for 1998. These increases were primarily attributable to an increase in
our customer base resulting in substantial growth in license and maintenance
revenue, as well as additional sales to our existing customers. In 1999, no
distributor or end customer accounted for over 10% of our total revenue. In
1998, one distributor accounted for approximately 11% of our total revenue and
one end customer accounted for approximately 12% of our total revenue.
License revenue. License revenue increased by 55.5% to $13.0 million for
1999 from $8.4 million for 1998. The increase in revenue was primarily
attributable to increased market acceptance of our Synplify and HDL Analyst
products, and to a lesser degree, the introduction of our Certify product in
1999. The increase also reflects the results from a larger and more productive
sales force.
Maintenance revenue. Our maintenance revenue increased by 94.2% to $5.2
million for 1999 from $2.7 million for 1998. The increase in maintenance
revenue was primarily attributable to the increase in license sales to new and
existing customers, in connection with which we generally sell one year of
maintenance support services, as well as an increase in revenue from customers
renewing maintenance support services.
Cost of revenue
Cost of license revenue. Our cost of license revenue increased 61.5% to
$239,000 for 1999 from $148,000 for 1998. The increase in the cost of license
revenue in absolute dollars was due primarily to the increased volume of unit
shipments during the year. As a percent of license revenue, the cost of license
revenue remained unchanged at 1.8% for 1999 and 1998.
Cost of maintenance revenue. Our cost of maintenance revenue increased
123.5% to $1.2 million for 1999 from $531,000 for 1998. As a percent of
maintenance revenue, the cost of maintenance revenue increased to 23.0% for
1999 from 20.0% for 1998. The increase in cost of maintenance revenue was
primarily attributable to increased hiring of customer support personnel to
provide improved levels of service to our growing customer base.
24
Operating expenses
Research and development. Our research and development expenses increased
99.0% to $8.0 million for 1999 from $4.0 million for 1998. As a percent of
total revenue, research and development expenses increased to 44.1% for 1999
from 36.6% for 1998. This increase in research and development expenses was
primarily attributable to an increase in the number of software engineers we
employed for the enhancement of existing products and the development of new
products, including Amplify Physical Optimizer.
Sales and marketing. Our sales and marketing expenses increased 55.1% to
$12.9 million for 1999 from $8.3 million for 1998. The absolute dollar increase
in sales and marketing expenses was primarily attributable to the hiring of
additional sales and marketing personnel, increases in commissions due to
increased sales and the expansion of our sales offices, particularly in Europe.
As a percent of total revenue, sales and marketing expenses decreased to 71.0%
for 1999 from 75.4% for 1998. The decrease in sales and marketing expenses as a
percent of total revenue was primarily attributable to the increase in total
revenue for 1999.
General and administrative. Our general and administrative expenses
increased 59.6% to $2.6 million for 1999 from $1.6 million for 1998. The
absolute dollar level increase in general and administrative expenses was
primarily attributable to the hiring of additional finance and operations
personnel, as well as increased legal, accounting and other consulting fees. As
a percent of total revenue, general and administrative expenses decreased to
14.2% for 1999 from 14.7% for 1998. The decrease in general and administrative
expenses as a percent of total revenue was primarily attributable to the
increase in total revenue for 1999.
Stock-based compensation. We did not incur any stock-based compensation
expense for the year ended December 31, 1998. Stock-based compensation expense
was $175,000 for the year ending December 31, 1999. This compensation related
to the following: cost of maintenance and research and development expenses of
$118,000, and sales and marketing and general and administrative expenses of
$57,000.
Other income (expense), net
Our other expense, net decreased to $7,000 for 1999 from $19,000 for 1998,
as a result of increased interest income on higher levels of cash, cash
equivalent and investment balances offset by higher interest expense from a
higher level of borrowing.
Liquidity and Capital Resources
As of December 31, 2000, we had cash and cash equivalents of $24.5 million,
short-term investments of $12.1 million, an accumulated deficit of $13.8
million and working capital of $30.7 million.
Net cash provided by operating activities was $419,000 for the year ended
December 31, 2000, and net cash used in operating activities was $3.4 million
for the year ended December 31, 1999 and $1.9 million for the year ended
December 31, 1998. Cash provided by operating activities for 2000 resulted
primarily from increases in deferred revenue and accrued liabilities. These
sources of cash were partially offset by net losses and increases in accounts
receivable. Cash used in operating activities for 1999 and 1998 resulted
primarily from net losses in those periods, and to a lesser extent, increases
in accounts receivable. These uses of cash were partially offset by increases
in accrued liabilities and deferred revenue.
Net cash used in investing activities was $18.4 million for the year ended
December 31, 2000, $1.3 million for the year ended December 31, 1999 and $1.5
million for the year ended December 31, 1998. Net cash used was primarily for
investments of cash and purchases of new computers, equipment and furniture as
we expanded operations. We expect to use approximately $2.5 million of cash to
purchase property and equipment over the next 12 months.
Net cash provided by financing activities was $39.8 million for the year
ended December 31, 2000, $6.1 million for the year ended December 31, 1999 and
$2.3 million for the year ended December 31, 1998. For
25
2000, net cash provided by financing activities was primarily due to the sale
of $5.5 million of series C preferred stock and the completion of our initial
public offering in October 2000. For 1999, net cash provided by financing
activities was primarily due to the sale of $7.4 million of series B preferred
stock in March 1999. For 1998, net cash provided by financing activities was
primarily due to equipment loans and borrowings under a bank line of credit.
As of December 31, 2000, we had $271,000 in fixed term obligations.
We also have a $3.0 million line of credit with Silicon Valley Bank. The
line of credit expires in March 2002 and has an interest rate equal to the
prime rate. Advances under the line of credit are limited to a specified
percent of eligible accounts receivable as defined in the line of credit
agreement. As of December 31, 2000, we had no borrowings outstanding under this
line of credit and had available borrowings under the line of approximately
$3.0 million. We are subject to financial ratio and other covenants in
connection with this line of credit and were in compliance with the covenants
as of December 31, 2000.
Our future liquidity and capital requirements will depend on numerous
factors, including:
. the amount and timing of license revenue;
. the extent to which our existing and new products gain market acceptance;
. the extent to which customers continue to renew annual maintenance;
. the cost and timing of expansion of product development efforts and the
success of these development efforts;
. the cost and timing of expansion of sales and marketing activities; and
. available borrowings under line of credit arrangements.
We believe that our current cash and investment balances and any cash
generated from operations and from current credit facilities will be sufficient
to meet our operating and capital requirements for at least the next 12 months.
However, it is possible that we may require additional financing within this
period. We intend to continue to invest heavily in the development of new
products and enhancements to our existing products. The factors described above
will affect our future capital requirements and the adequacy of our available
funds. In addition, even if we have sufficient funds to meet our anticipated
cash needs during the next 12 months, we may need to raise additional funds
beyond this time. We may be required to raise those funds through public or
private financings, strategic relationships or other arrangements. We cannot
assure you that such funding, if needed, will be available on terms attractive
to us, or at all. Furthermore, any additional equity financing may be dilutive
to shareholders, and debt financing, if available, may involve restrictive
covenants. If we fail to raise capital when needed, our failure could have a
negative impact on our profitability and our ability to pursue our business
strategy.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation ("FIN 44"), which contains rules designed to clarify the
application of APB 25. We adopted FIN 44 on July 1, 2000. The impact of
adoption of FIN 44 was not material to our operating results and financial
position.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We adopted SAB 101 in our fiscal
quarter beginning October 1, 2000. The adoption of SAB 101 had no impact to our
operating results and financial position.
26
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which will be effective for the year ending December 31, 2001. This 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 of liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. We believe the adoption of SFAS 133 will not have
a material effect on our operating results or financial position, since we
currently do not invest in derivative instruments or engage in hedging
activities.
Factors Affecting Future Operating Results
We have a history of losses and may experience losses in the future, which
could result in the market price of our common stock declining
Since our inception, we have incurred significant net losses, including net
losses of $2.6 million in 2000, $6.9 million in 1999 and $3.6 million in 1998.
We expect to continue to incur significant research and development, sales and
marketing and general and administrative expenses. As a result, we will need to
generate significant revenue to achieve profitability. If we do not achieve and
maintain profitability, the market price of our common stock may decline,
perhaps substantially.
We anticipate that our expenses will increase substantially in the next 12
months as we:
. continue to invest in research and development to enhance our existing
products and technologies;
. develop additional logic synthesis, physical synthesis and verification
products;
. increase our sales and marketing activities, particularly by expanding
our direct sales force outside North America;
. continue to increase the size and number of locations of our customer
support organization and begin to provide consulting services; and
. implement additional internal systems, develop additional infrastructure
and hire additional management to keep pace with our growth.
Any failure to significantly increase our revenue as we implement our
product and distribution strategies would also harm our ability to achieve and
maintain profitability and could negatively impact the market price of our
common stock.
We may not be able to increase our revenue at rates that meet the expectations
of investment analysts and others, which could cause our stock price to decline
Our annual rate of revenue growth increased to 90% in 2000 from 65% in 1999.
We currently anticipate that we will not exceed or maintain our historical
rates of revenue growth in 2001. As our revenue base grows larger, it will be
difficult to maintain high percentage increases over time. If we fail to
introduce new products or enhanced versions of existing products when expected,
the rate of our revenue growth could decline. In addition, growing competition
and our inexperience in selling our products to customers that use ASICs and
SoCs could also adversely affect our revenue growth. Our revenue could decline
as a result of technological changes that negatively affect the demand for
FPGAs, ASICs and SOCs. Any significant decrease in our rate of revenue growth
after this offering would likely result in a decrease in our stock price,
because our revenue may fail to meet the expectations of investment analysts
and others.
27
Our quarterly operating results and stock price may fluctuate, because our
ability to accurately forecast our quarterly sales is limited, our costs are
relatively fixed in the short term and we expect our business to be affected by
seasonality
Because of the rapidly evolving market for FPGAs, ASICs and SOCs, our
ability to accurately forecast our quarterly sales is limited, which makes it
difficult to predict the quarterly revenue that we will recognize. In addition,
the time to initiate and complete a sale for our products is relatively short,
and our ability to foresee and react to changes in customer demand for our
products may be limited and, therefore, be inaccurate. Most of our costs are
for personnel and facilities, which are relatively fixed in the short term. If
we have a shortfall in revenue in relation to our expectations, we may be
unable to reduce our expenses quickly to avoid lower quarterly operating
results. We also do not know whether our business will grow rapidly enough to
absorb the costs of our personnel and facilities. As a result, our quarterly
operating results could fluctuate, and the fluctuations could adversely affect
the market price of our common stock.
In addition, we expect to experience fluctuations in the sale of licenses
for our products due to seasonality. For example, we expect that sales may
decline during the summer months, particularly in European markets. We have
experienced and anticipate we will continue to experience relatively lower
sales in our first fiscal quarter due to patterns in the capital budgeting and
purchasing cycles of our current and prospective customers and the economic
incentives for our sales force. These factors may lead to fluctuations in our
quarterly operating results. It is difficult for us to evaluate the degree to
which these capital budgeting and customer purchasing cycle variations and
sales incentives may reduce our sales because our recent revenue growth may
have largely overshadowed these factors in recent periods.
We have relied and expect to continue to rely on sales of our Synplify,
Synplify Pro and HDL Analyst products for a substantial majority of our license
revenue, and a decline in sales of these products could cause our license
revenue to decline
Historically, we have derived substantially all of our revenue from sales of
our Synplify, Synplify Pro and HDL Analyst products. License revenue for our
Synplify, Synplify Pro and HDL Analyst products accounted for approximately 83%
of our license revenue in 2000, approximately 93% of our license revenue in
1999 and 100% of our license revenue in 1998. We expect that the revenue from
these products will continue to account for a majority of our license revenue
for at least the next fiscal year. Any factors adversely affecting the pricing
of our licenses or demand for our Synplify, Synplify Pro and HDL Analyst
products, including competition or technological change, could cause our
license revenue to decline and our business to suffer. Factors that may affect
sales of our Synplify, Synplify Pro and HDL Analyst products, some of which are
beyond our control, include the following:
. the growth and changing requirements of the programmable semiconductor
market, particularly with respect to FPGAs;
. the performance, quality, price and total cost of ownership of our
software products relative to other logic synthesis products for FPGAs;
and
. maintaining and enhancing our existing relationships with leading
manufacturers of FPGAs, which may provide us advance information or
detailed data about those vendors' FPGAs and software.
We may not succeed in developing and marketing new logic synthesis, physical
synthesis and verification products, and our operating results may decline as a
result
We intend to develop additional logic synthesis, physical synthesis and
verification products. Developing new products that meet the needs of
electronic product designers requires significant investments in research and
development. If we fail to successfully develop and market new products, our
operating results will decline.
28
We introduced our Certify product in 1999, our Amplify Physical Optimizer
product in March 2000 and our Synplify Pro product in May 2000. To date, these
products have accounted for only a limited portion of our revenue. However, our
future growth and profitability will depend on our ability to increase sales of
these verification, physical and logic synthesis products. If customers do not
accept and widely adopt these products our operating results will decline.
We intend to develop a new logic synthesis product for ASIC design and
intend to develop other products that leverage our core capabilities.
Developing these products and other required features for the release of new
products will require significant investments in research and development. We
cannot be certain that our entry into the ASIC logic synthesis product market
or other new markets will be successful or that our customers will accept and
widely adopt these products.
Our revenue could decline substantially if our existing customers do not
continue to purchase additional licenses or maintenance from us
We rely on sales of additional licenses to our existing customers, as well
as annual maintenance renewals for our products. Additional license sales to
our existing customers represented approximately 73% of our license revenue in
2000 and approximately 45% in 1999. If we fail to sell additional licenses for
our products to our existing customers or if they fail to renew their annual
maintenance, we would experience a material decline in revenue. Even if we are
successful in selling our products to new customers, the rate of growth of our
revenue could be harmed if our existing customers do not continue to purchase a
substantial number of additional licenses from us or fail to renew their
maintenance.
If we experience any increase in the length of our sales cycle, our quarterly
operating results could become more unpredictable and our stock price may
decline as a result
We experience sales cycles, the time between an initial customer contact and
completing a sale, generally ranging from two weeks to four months, depending
on the product. If we experience any increase in the length of our sales cycle,
our quarterly operating results could suffer and our stock price could decline
as a result. In addition, for all of our products, a typical customer may
purchase a small number of licenses and then incrementally increase the number
of licenses over time. If customers were to implement enterprise-wide
evaluation programs or purchase products for the entire organization at once,
our sales cycle could lengthen and our revenue could be more unpredictable from
quarter to quarter. We do not have enough historical experience selling our
Amplify Physical Optimizer product to determine how the sales cycle for this
product will affect our revenue; however, the sales cycle could be longer and
could result in unpredictability in our revenue from quarter to quarter.
Our business depends on continued demand for next generation networking
equipment and other complex electronic equipment that incorporate FPGAs, ASICs
or SoCs, and our revenue may suffer if demand for FPGAs, ASICs and SoCs does
not continue
Demand for next generation networking equipment may decrease if internet use
declines, the build-out of internet infrastructure or communications networks
slows or surplus capacity in existing communications and internet
infrastructure develops. Potential consumers of next generation networking
equipment, such as communications companies, may use or modify existing types
of equipment and never adopt next generation networking equipment. If the
business of next generation networking equipment manufacturers does not
continue at its current level of growth or declines, our revenue and business
will suffer, because our products are used to design the FPGAs, ASICs and SoCs
that are an integral part of next generation networking equipment.
29
The markets for FPGAs, ASICs and SoCs are evolving rapidly and if these markets
do not develop and expand as we anticipate, our revenue may not grow, because
our products may not be needed
We expect that substantially all of our revenue will continue to come from
sales of our logic synthesis, physical synthesis and verification products. We
depend on the growing use of logic synthesis products to design FPGAs for use
in next generation networking equipment and other applications. If the role of
FPGAs in communications infrastructure equipment and computer networking
equipment does not increase as we anticipate, or decreases, our revenue would
decline. The FPGA market may not grow if customers choose to use other
semiconductors that might be more affordable or available with shorter time to
market schedules. This could cause electronic equipment manufacturers to limit
the number of new FPGAs they design and would reduce their need for our
products. We also depend on the continued adoption of ASICs and SoCs in order
for our revenue to increase. If demand for our software products were to
decline, we may choose to lower the prices of our products or we may sell fewer
licenses and have lower maintenance renewal rates. In addition, if equipment
manufacturers do not widely adopt the use of FPGAs, or if there is a wide
acceptance of alternative semiconductors that provide enhanced capabilities,
the market price of our stock could decline due to our lower operating results
or investors' assessment that the growth potential for sales of our licenses is
limited.
The markets for FPGAs, ASICs and SoCs are evolving rapidly and we cannot
predict their potential sizes or future growth rates. Our success in generating
revenue in these evolving markets will depend on, among other things, our
ability to:
. educate potential designers, next generation networking equipment and
other electronics companies about the benefits of FPGAs, ASICs and SoCs
and the use of logic synthesis, physical synthesis and verification
products to design them;
. establish and maintain relationships with leading FPGA manufacturers,
electronic equipment designers and next generation networking equipment
and other electronics companies and maintain and enhance our
relationships with our other customers; and
. predict and base our products on technology that ultimately becomes
industry standard.
We depend on our marketing, product development and sales relationships with
leading FPGA manufacturers, and if these relationships suffer, we may have
difficulty introducing and selling our products and our revenue would decline
We believe that our success in penetrating our target markets depends in
part on our ability to maintain or further develop our strategic marketing,
product development and sales relationships with leading FPGA manufacturers,
including Altera and Xilinx. We believe our relationships with leading FPGA
manufacturers are important in order to validate our technology, facilitate
broad market acceptance of our products and enhance our sales, marketing and
distribution capabilities. For example, we attempt to coordinate our product
offerings with the future releases of Altera's and Xilinx's FPGA components and
software. If we are unable to maintain and enhance our existing relationships
with Altera and Xilinx and develop a similar relationship with other major FPGA
vendors, we may have difficulty selling our products or we may not be able to
introduce products on a timely basis that capitalize on new FPGA component
characteristics or software feature enhancements. These manufacturers may also
compete in the FPGA product market by developing their own synthesis products.
For example, Xilinx has recently begun selling a synthesis product that could
be competitive with our Synplify product. These manufacturers may adversely
impact the price of our products through the expansion of their distribution of
our competitors' products. Either of these developments could harm our business
and financial prospects.
30
Sales of FPGA components may be harmed due to natural disasters or political
unrest and as a result, sales of our products may decline, if events occur that
limit the ability of FPGA manufacturers to manufacture and ship their products
We believe that a majority of all FPGA components is produced in Taiwan by
foundry partners of leading FPGA manufacturers. These foundry and manufacturing
activities are located in areas that have been seismically active, as
demonstrated by the earthquakes that occurred in Taiwan during the fall of
1999. If a major earthquake affecting key FPGA manufacturing locations occurs
in the future, leading FPGA manufacturers' operations may be disrupted. In
addition, tensions between the governments of Taiwan and the People's Republic
of China could disrupt operations of FPGA manufacturers' foundry partners if
military conflict were to occur between the People's Republic of China and
Taiwan, a state of emergency were declared in Taiwan or civil unrest were to
erupt in Taiwan. These types of disruptions could result in FPGA manufacturers'
inability to ship products in a timely manner, and, as a result, demand for our
products may be reduced and our business would suffer.
We rely on a continuous power supply to conduct our operations, and
California's 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 California. We currently do not have
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for any damages we or our
customers may suffer as a result of any interruption in our power supply. If
blackouts interrupt our power supply, we would be temporarily unable to
continue operations at our facilities. Any such interruption in our ability to
continue operations at our facilities could damage our reputation, harm our
ability to retain existing customers and to obtain new customers, and could
result in lost revenue, any of which could substantially harm our business and
results of operations.
Our success depends on the continued growth of the internet, which could be
impeded by, among other things, declining use or increased government
regulation
Our success depends on the internet infrastructure semiconductor industry,
which in turn depends on increased use of the internet for e-commerce and other
commercial and personal activities. Consumers and businesses may choose not to
use the internet for a number of reasons, including: internet access costs;
inconsistent service quality; unavailability of cost-effective, high-speed
service; perceived security risks, such as a lack of confidence in encryption
technology; and privacy concerns. In addition, governmental agencies and
legislators may respond to these concerns or others about the internet with
laws and regulations covering issues such as user privacy or security,
obscenity, freedom of expression, pricing, content and quality of products and
services, copyright and other intellectual property issues and taxation. Such
legislation or rule making could dampen the growth in internet use generally
and decrease the acceptance of the internet as a commercial medium. If use of
the internet decreases, some of our customers may experience slower or negative
growth in demand for their products, which could impact their purchases of our
software products and reduce our operating results.
If we do not continue to expand our sales force substantially to increase sales
of our products, our revenue may not grow
Our products require a sophisticated sales effort that depends on
experienced and knowledgeable sales personnel. Competition for these
individuals is intense due to the limited number of people available with the
necessary sales experience and technical understanding of our products. If we
are unable to continue to identify, hire, train and retain these individuals,
our revenue may not grow.
31
Because we rely on channel partners to sell a portion of our products, our
revenue could decline if our existing channel partners do not continue to
purchase products from us
We rely on semiconductor distributor Insight to refer customers to us, which
results in a portion of our license sales in North America. A majority of our
sales outside North America are conducted through our channel partners, and we
have opened a direct sales office in Japan. Sales to our channel partners
accounted for approximately 21% of our total revenue in 2000 and approximately
28% of our total revenue in 1999. If we fail to sell our products through our
existing channel partners or directly, we would experience a material decline
in revenue. We cannot be certain that we will be able to attract channel
partners that market our products effectively or provide timely and cost-
effective customer support and service. Even if we are successful in selling
our products through new channel partners, the rate of growth of our total
revenue could be harmed if our existing channel partners do not continue to
sell our products. In the past, we have terminated our relationships with
certain channel partners for poor performance. None of our existing channel
partners is obligated to continue selling our products. We face the risk that
one or more of our channel partners will not continue to represent our products
or that our channel partners will not devote a sufficient amount of effort and
resources to selling our products in their territories.
Our expansion to international markets will result in higher personnel costs
and could reduce our operating margins due to the higher costs of international
sales
In order to significantly penetrate international markets, we plan to
increase our direct international sales presence. We may also expand the number
of channel partners who sell our products. To date, we have relied primarily on
international channel partners and have only recently begun to significantly
employ direct sales personnel outside of the United States. As we increase our
direct international sales presence, we will incur higher personnel costs that
may not result in additional revenue. If we rely on channel partners, our
exposure to the risks described above may increase. If we expand our direct and
indirect international selling efforts successfully, our efforts may not create
or increase international market demand for our products. Even if we increase
our international sales, we may not realize corresponding growth in operating
margins, due to the higher costs of these sales. Our revenue outside North
America represented approximately 21% of our total revenue in 2000 and
approximately 20% of our total revenue in 1999.
If we are unable to continue to expand our customer service and support
organization, we may not be able to retain our existing customers or attract
new customers, and our revenues could decline as a result
We will need to continue to increase our customer service and support staff
to support new customers and the expanding needs of our existing customers.
Hiring customer service and support personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of the design of FPGAs, ASICs and SoCs and,
accordingly, we may not succeed in doing so. If we are unable to expand our
customer service and support organization, we may not be able to retain our
existing customers, customers may not renew their maintenance or we may not be
able to attract new customers.
We may not be able to effectively compete against other providers of products
that design FPGAs, ASICs and SoCs, as a result of their greater financial
resources and distribution channels, which could cause our sales to decline
We face significant competition from larger companies that market suites of
semiconductor design software products that address all or almost all steps of
semiconductor design or that incorporate intellectual property components for
semiconductors. These competitors have greater financial resources and name
recognition than we do. We believe that Mentor Graphics and Synopsys, each of
which is also currently competing with us by marketing logic synthesis or
verification products, could also introduce new suites of products or
individual products that include the functionality that we currently provide in
our products and at lower prices or they may otherwise have more favorable
relationships with customers. If these or other vendors
32
provide lower cost logic synthesis, physical synthesis or verification products
that outperform our products in addition to having broader applications of
their existing product lines, our products could become unsaleable. Even if our
competitors' standard products offer functionality equivalent to ours, we face
a substantial risk that a significant number of customers would elect to pay a
premium for similar functionality rather than purchase products from a less
well-known vendor.
We may face competition in the future from established FPGA manufacturers
that compete in the design software market, such as Altera or Xilinx, or from
emerging software companies. Increased competition may negatively affect our
business and future operating results by leading to price reductions, higher
selling expenses or a reduction in our market share.
Our products are subject to rapid technological change and could be rendered
obsolete and unsaleable
The semiconductor design software market is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving
industry standards. Our products could be rendered obsolete if design products
based on new technologies are introduced or new industry standards emerge. For
example, if customers widely adopt new engineering languages to describe their
semiconductor designs and our products fail to support those languages
adequately, our business will suffer.
We may not be able to compete effectively if our products are delayed or do not
incorporate new specifications, and if we cannot compete effectively, our
business could be damaged
Our future success depends on our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements, meet
industry standards and achieve market acceptance. We may not successfully
identify new product opportunities or develop and bring new products to market
in a timely and cost-effective manner. Significant delays in new product
releases or significant problems or delays in enhancing existing products or
implementing new products to keep pace with new FPGA specifications could
seriously damage our business. We have, from time to time, experienced delays
in the scheduled introduction of new and enhanced products and we may
experience similar delays in the future.
We may sell fewer products and our revenue may decline if other vendors'
products are no longer compatible with ours or other vendors bundle their
products with those of our competitors and sell them at lower prices
Our ability to sell our products depends in part on the compatibility of our
products with other vendors' semiconductor design software and verification
hardware products. These vendors may change their products so that they will no
longer be compatible with our products. Some vendors already bundle their
products with other logic synthesis, physical synthesis or verification
products and sell the bundle at lower prices, and more vendors may do so in the
future. As a result, this may negatively affect our ability to offer
commercially viable or competitive products.
Our revenue could be reduced if large semiconductor design software companies
make acquisitions in order to join their extensive distribution capabilities
with our competitors' products
Large semiconductor design software vendors, such as Cadence, Mentor
Graphics or Synopsys, may also acquire or establish cooperative relationships
with our other current competitors, including private companies. Because large
semiconductor design software vendors have significant financial and
organizational resources available, they may be able to further penetrate the
logic synthesis, physical synthesis or verification markets by leveraging the
technology and expertise of smaller companies and utilizing their own extensive
distribution channels. We expect that the semiconductor design software product
industry will continue to consolidate. For example, Cadence acquired CadMOS
Design Technology, Inc., a design tools firm, in February 2001. It is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share, which would harm our business and financial
prospects.
33
We may not be able to preserve the value of our products' intellectual property
rights because we do not have any patents and other vendors could challenge our
intellectual property rights
Our products are differentiated from those of our competitors by our
internally developed technology that is incorporated into our products. If we
fail to protect our intellectual property rights, other vendors could sell
logic synthesis, physical synthesis or verification products with features
similar to ours, and this could reduce demand for our products. We protect our
intellectual property rights through a combination of copyright, trade secret
and trademark laws. We have only recently commenced a patent program and to
date have filed only eight patent applications, one of which was issued in
January 2001. We generally enter into confidentiality or license agreements
with our employees, consultants and corporate partners, and generally seek to
control access to our intellectual property rights and the distribution of our
logic synthesis, physical synthesis and verification products, documentation
and other proprietary information. However, we believe that these measures
afford only limited protection. Others may develop technologies that are
similar or superior to our technology or design around the copyrights and trade
secrets we own. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise improperly obtain and use
our products or technology. Policing unauthorized use of our products is
difficult and expensive, and we cannot be certain that the steps we have taken
will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as
those in the United States. For example, with respect to our sales and support
operations in India, the laws in India do not protect proprietary rights to the
same extent as the United States, and Indian statutory law does not protect
service marks. Our means of protecting our proprietary rights may be
inadequate.
Our operating results would suffer if we were subject to a protracted
infringement claim or a significant damage award
Substantial litigation and threats of litigation regarding intellectual
property rights exist in our industry. We expect that logic synthesis, physical
synthesis and verification products may be increasingly subject to third-party
infringement claims as the number of competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. We
are not aware that our products employ technology that infringes any valid
proprietary rights of third parties. However, third parties may claim that we
infringe their intellectual property rights. Any claims, with or without merit,
could:
. be time consuming to defend;
. result in costly litigation and/or damage awards;
. divert our management's attention and resources;
. cause product shipment delays; or
. require us to seek to enter into royalty or licensing agreements.
These royalty or licensing agreements may not be available on terms
acceptable to us, if at all. A successful claim of product infringement against
us or our failure or inability to license the infringed or similar technology
could adversely affect our business because we would not be able to sell the
impacted product without exposing ourselves to litigation risk and damages.
Furthermore, redevelopment of the product so as to avoid infringement would
cause us to incur significant additional expense. Although we maintain business
insurance, it would not cover an infringement claim, and we would be required
to pay any damages and legal expenses from a successful claim ourselves.
Our recent growth has placed a significant strain on our management systems and
resources, and we may be unable to effectively control our costs and implement
our business strategies as a result
As we continue to increase the scope of our operations, our headcount has
grown substantially. Our total number of employees increased to 210 as of
December 31, 2000 from 140 as of December 31, 1999. Our productivity and the
quality of our products may be adversely affected if we do not integrate, train
and
34
motivate our new employees quickly and effectively. We also cannot be sure that
our revenue will continue to grow at a sufficient rate to absorb the costs
associated with a larger overall headcount, as well as training and recruiting
expenses.
We may be unable to attract, assimilate or retain highly qualified software
engineers and other research and development employees. There is a severe
shortage of qualified personnel in the San Francisco Bay area where our
headquarters are located. The scarcity of these persons in the current market
may cause us to incur higher salary costs, require us to provide larger stock
option grants or require us to establish additional costly development
locations outside the San Francisco Bay area. If we fail to attract, motivate
and retain these engineers, we may be unable to complete development of our
products or meet the demands of our customers in a timely manner and our
business would suffer.
We are subject to employer payroll taxes when employees in certain foreign
countries exercise stock options or purchase shares under our employee plans.
These payroll taxes are assessed on the gain, which is the difference between
the common stock price on the date of exercise or purchase and the exercise or
purchase price. The tax rate varies depending upon the employees' taxing
jurisdiction. Because we are unable to predict how many stock options will be
exercised, at what price and in which country, we are unable to predict what,
if any, expense will be recorded in a future period.
We expect that any future growth we experience will continue to place a
significant strain on our management, systems and resources. To manage the
anticipated growth of our operations, we may be required to:
. hire, train, manage and retain additional qualified personnel, especially
software engineers;
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures; and
. establish relationships with additional suppliers and corporate partners
and maintain our existing relationships.
We rely on the services of our founders and other key personnel, and those
persons' knowledge of our business and technical expertise would be difficult
to replace
Our products and technologies are complex and we depend substantially on the
continued service of Bernard Aronson, our President and Chief Executive
Officer, and our existing engineering personnel, especially Kenneth S.
McElvain, our Chief Technology Officer and Vice President and a founder, and
Robert Erickson, our Vice President of Engineering. The loss of any of our key
employees could adversely affect our business and slow our product development
process. Although we maintain key person life insurance on Mr. McElvain, we do
not maintain key person life insurance on any of our other employees and the
amount of the policy on Mr. McElvain may be inadequate to compensate us for his
loss.
Because our strategy to expand our international operations is subject to
uncertainties, we may not be able to enter new international markets or
generate a significant level of revenue from those foreign markets
Although customers outside North America accounted for $7.1 million of our
total revenue in 2000 and $3.6 million of our total revenue in 1999, the
absolute dollar amount of our international sales was relatively small and must
grow substantially in order for us to achieve and maintain profitability. We
plan to increase our international sales activities, but we have limited
experience marketing and directly selling our products internationally.
We have sales offices in France, Germany, India, Israel, Japan and the
United Kingdom. We also rely on indirect sales in Asia, Europe and elsewhere.
Our sales contracts generally provide for payment for our products in United
States dollars. However, on January 1, 2001, we began direct sales to our
customers in
35
Japan in yen and expect all such future sales will be denominated in yen. Our
expenses incurred in foreign locations are generally denominated in the
respective local currency. To date we have not undertaken any foreign currency
hedging transactions, and as a result, our future revenue and expense levels
from international operations may be unpredictable due to exchange rate
fluctuations. Our international operations are subject to other risks,
including:
. the impact of economic conditions, such as interest rate increases or
inflation, which may lead to higher cost of capital and slower demand for
capital equipment used to build next generation networks;
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements, including government
ownership of communications systems, laws relating to use of and sales
over the internet or tariffs;
. difficulties and costs of staffing and managing foreign operations;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences, including taxes due on the exercise
of stock options or purchase of shares under employee plans by foreign
employees and the impact of expiry of tax holidays;
. foreign currency fluctuations; and
. political instability, which may limit production of FPGAs in Asia or
reduce government or private sector spending on next generation
networking equipment.
Significant errors in our products or the failure of our products to conform to
specifications could result in our customers demanding refunds from us or
asserting claims for damages against us
Because our logic synthesis, physical synthesis and verification products
are complex, our products could fail to perform as anticipated or produce
semiconductors that contain errors that are undetected at any point in the
customers' design cycle. While we continually test our products for errors and
work with users through our customer support service organization to identify
and correct errors in our software and other product problems, errors in our
products may be found in the future. Although a number of these errors may
prove to be immaterial, many of these errors could be significant. The
detection of any significant errors may result in:
. the loss of or delay in market acceptance and sales of our products;
. delays in shipping dates for our products;
. diversion of development resources from new products to fix errors in
existing products;
. injury to our reputation;
. costs of corrective actions or returns of defective products;
. reduction in maintenance renewal rates; or
. product liability claims or damage awards.
Occasionally, we have warranted that our products will operate in accordance
with specified customer requirements. If our products fail to conform to these
specifications, customers could demand a refund for the purchase price or
assert and collect on claims for damages. Although we maintain general business
insurance, our coverage does not extend to product liability claims, and we
cannot assure you that our resources would be sufficient to pay a damages
award, if one were to arise.
Moreover, because our products are used in connection with other vendors'
products that are used to design complex FPGAs, ASICs and SoCs, significant
liability claims may be asserted against us if our products do not work
properly, individually or with other vendors' products for which we also do not
maintain insurance. Our agreements with customers typically contain provisions
intended to limit our exposure to
36
liability claims. However, these limitations may not preclude all potential
claims and we do not insure against such liabilities. Regardless of their
merit, liability claims could require us to spend significant time and money in
litigation and divert management's attention from other business pursuits. If
successful, a product liability claim could require us to pay significant
damages. Any claims, whether or not successful, could seriously damage our
reputation and our business.
Our common stock may be subject to substantial price and volume fluctuations
due to a number of factors, many of which will be beyond our control, which may
prevent our shareholders from reselling our common stock at a profit
The securities markets recently have experienced significant price and
volume fluctuations and the market prices of the securities of technology
companies have been especially volatile. This market volatility, as well as
general economic, market or political conditions, could reduce the market price
of our common stock in spite of our operating performance. In addition, our
operating results could be below the expectations of investment analysts and
investors, and in response the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the offering price. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs, liabilities and
a diversion of management's attention and resources.
Our officers and persons affiliated with our directors hold a substantial
portion of our stock and could reject mergers or other business combinations
that a shareholder may believe are desirable
As of December 31, 2000, our directors, officers and individuals or entities
affiliated with our directors beneficially own approximately 69% of our
outstanding common stock as a group. Acting together, these shareholders would
be able to significantly influence all matters that our shareholders vote upon,
including the election of directors or the rejection of a merger or other
business combination that other shareholders may believe is desirable.
The provisions of our charter documents may inhibit potential acquisition bids
that a shareholder may believe are desirable, and the market price of our
common stock may be lower as a result
Our board of directors has the authority to issue up to 10,000,000 shares of
preferred stock. Our board of directors can fix the price, rights, preferences,
privileges and restrictions of the preferred stock without any further vote or
action by our shareholders. The issuance of shares of preferred stock may delay
or prevent a change in control transaction. As a result, the market price of
our common stock and the voting and other rights of our shareholders may be
adversely affected. The issuance of preferred stock may result in the loss of
voting control to other shareholders. We have no current plans to issue any
shares of preferred stock.
This provision could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. It could also have the effect
of discouraging others from making tender offers for our common stock. As a
result, these provisions may prevent the market price of our common stock from
increasing substantially in response to actual or rumored takeover attempts.
This provision may also prevent changes in our management.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell those products primarily
in North America, Europe and Japan. Our revenue for sales outside North America
was approximately 21% of our total revenue in 2000 and 20% of our total revenue
in 1999. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As the majority of our sales are made in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
foreign markets. Our expenses incurred in foreign locations are generally
denominated in the respective local
37
currency and translated to United States dollars using the average exchange
rate during the period. Balance sheet accounts are translated using the current
exchange rate in effect at the balance sheet date. The effects of translation
are included in the results of operations and to date have not been material.
Historically, our exposure to foreign exchange fluctuations has been minimal;
however, as our international sales and operations expand, we anticipate that
our exposure to foreign currency fluctuations will increase. Specifically, on
January 1, 2001, we began direct sales to our customers in Japan in yen and
expect all such future sales will be denominated in yen. We have not undertaken
any hedging actions to reduce our exposure to changes in foreign currency
exchange rates.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
have concluded that we do not have material market risk exposure.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
. obligations of the U.S. government and its agencies;
. investment grade state and local government obligations;
. securities of U.S. corporations rated A1 or P1 by Standard & Poors' or
the Moody's equivalents; and/or
. money market funds, deposits or notes issued or guaranteed by U.S. and
non-U.S. commercial banks meeting certain credit rating and net worth
requirements with maturities of less than two years.
As of December 31, 2000, our cash equivalents consisted primarily of money
market funds, commercial paper and U.S. government agency notes, and our short-
term investments consisted primarily of corporate notes and U.S. government
agency notes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and the independent
auditors' report appear on pages F-1 through F-19 of this Report.
Quarterly Data
Quarters Ended
-----------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- -------- --------
(in thousands, except per share data)
Revenue:
License............... $ 8,530 $6,722 $ 5,807 $ 3,947 $ 3,770 $ 3,351 $ 3,056 $ 2,842
Maintenance........... 3,000 2,478 2,231 1,875 1,576 1,396 1,176 1,008
------- ------ ------- ------- -------- ------- -------- -------
Total revenue....... 11,530 9,200 8,038 5,822 5,346 4,747 4,232 3,850
Gross profit............ 11,048 8,672 7,680 5,407 4,919 4,392 3,841 3,597
Net income (loss)....... $ 341 $ (161) $ (980) $(1,847) $ (1,873) $(1,519) $ (1,957) $(1,591)
Earnings per share:
Basic................. $ .02 $ (.01) $ (.07) $ (.14) $ (.14) $ (.11) $ (.15) $ (.12)
Diluted............... $ .01 $ (.01) $ (.07) $ (.14) $ (.14) $ (.11) $ (.15) $ (.12)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement related to the 2001 Annual Meeting of Stockholders,
to be filed by the Company with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year pursuant to General
Instruction G(3) of Form 10-K (the "Proxy Statement"). Certain information
required by this item concerning executive officers is set forth in Part I of
this Report in "Business--Management" and certain other information required by
this item is incorporated by reference from the section captioned "Section
16(a) Beneficial Ownership Reporting Compliance" contained in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Record Date; Outstanding Shares" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions" contained in the Proxy Statement.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements are incorporated by
reference in Item 8 of this Report:
Report of Independent Auditors
Consolidated Balance Sheets, December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves (see page
50)
Independent Auditors' Report (see page F-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.
(a)(3) Exhibits
3.1.1* Articles of Incorporation of the Registrant
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2* Amended and Restated Registration Rights Agreement dated March 31,
2000 by and among the Registrant and certain shareholders of the
Registrant
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2* Amended and Restated 1995 Stock Option Plan
10.2.1* Form of Option Agreement under the 1995 Stock Option Plan
10.3* 2000 Stock Option Plan
10.3.1* Form of Option Agreement under the 2000 Stock Option Plan
10.4* 2000 Director Option Plan
10.4.1* Form of Option Agreement under 2000 Director Option Plan
10.5* 2000 Employee Stock Purchase Plan
10.5.1* Form of Subscription Agreement under the 2000 Employee Stock Purchase
Plan
10.6* Promissory Note dated November 7, 1995 between Registrant and Andreas
Bechtolsheim
10.7*+ Authorized International Distributor Agreement dated February 13,
1996 between Registrant and Pacific Design, Inc.
40
10.8* Employment Agreement dated November 22, 1996 between Registrant and
Andrew Haines
10.9*+ Software OEM License Agreement dated December 23, 1997 by and among
Registrant, Cadence Design Systems, Inc. and Cadence Design Systems
(Ireland) Limited
10.9.1* Amendment 1 to Software OEM License Agreement dated August 1, 1998 by
and among Registrant, Cadence Design Systems, Inc. and Cadence Design
Systems (Ireland) Limited
10.9.2*+ Amendment 2 to Software OEM License Agreement dated December 17, 1999
by and among Registrant, Cadence Design Systems, Inc. and Cadence
Design Systems (Ireland) Limited
10.10* Employment Agreement dated June 19, 1997 between Registrant and
Bernard Aronson
10.11* Employment Agreement dated April 17, 1998 between Registrant and
Robert J. Erickson
10.12* Promissory Note and Security Agreement dated September 3, 1998
between Registrant and Robert J. Erickson
10.13* Employment Agreement dated October 1, 1998 between Registrant and
Douglas S. Miller
10.14*+ Distributor Agreement dated April 1, 1999 between Registrant and
Insight Enterprises Inc.
10.14.1 Addendum 4 to Distributor Agreement dated April 1, 1999 between
Registrant and Insight Enterprises Inc.
10.15* Sublease dated August 25, 1999 between Registrant and Proxim, Inc.
for the 935 Stewart Drive, Sunnyvale, California office
10.16* Sublease dated October 18, 1999 between Registrant and HRG, Inc., The
Human Resource Group for the 17055 Via del Campo, Office 109, San
Diego, California office
10.17* Lease dated July 15, 1999 between Registrant and Anthony Buxton and
R. Robert Reading, Trustees of Tactician Realty Trust for the 305
North Main Street, Andover, Massachusetts office
10.18* Promissory Note and Security Agreement dated November 29, 1999
between Registrant and Douglas S. Miller
10.19* Promissory Note and Security Agreement dated December 28, 1999
between Registrant and Douglas S. Miller
10.20* Lease dated January 27, 2000 between Registrant and Information
Technology Park Ltd. for the International Tech Park, Bangalore,
India office
10.21* Lease dated June 1, 2000 between Registrant and Becker Family Limited
Partnership for the 8217 Shoal Creek Blvd., Austin, Texas office
10.22*+ Distribution Agreement dated April 1, 1999 between Registrant and
Wyle Electronics
10.22.1 Addendum 3 to Distribution Agreement dated April 1, 1999 between
Registrant and Wyle Electronics
10.23* Amended and Restated Loan Security Agreement dated September 9, 1998
between Registrant and Silicon Valley Bank
10.23.1* Loan Modification Agreement dated December 15, 1999 between
Registrant and Silicon Valley Bank
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (Reference on II-1)
- --------
+ Portions of the exhibit have been omitted pursuant to a request for
confidential treatment and the omitted portions have been separately filed
with the Commission.
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-42146) as declared effective by the Securities and Exchange
Commission on October 12, 2000.
41
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the three months ended December 31, 2000.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
42
SYNPLICITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
----
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statement of Shareholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Synplicity, Inc.
We have audited the accompanying consolidated balance sheets of Synplicity,
Inc. (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 2000. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Synplicity,
Inc. at December 31, 2000 and 1999, and the consolidated 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. Also, in our opinion, the related 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/ Ernst & Young LLP
Palo Alto, California
January 22, 2001
F-2
SYNPLICITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
------------------
2000 1999
-------- --------
Assets:
Current assets:
Cash and cash equivalents ............................... $ 24,452 $ 2,633
Short-term investments................................... 12,083 --
-------- --------
Cash, cash equivalents and short term investments ..... 36,535 2,633
Accounts receivable, less allowances of $487 and $395 at
December 31, 2000 and 1999, respectively ............. 6,479 3,668
Other current assets..................................... 1,114 469
-------- --------
Total current assets .................................. 44,128 6,770
Long-term investments ................................... 4,688 --
Property and equipment, net ............................. 2,466 1,990
Other assets............................................. 681 359
-------- --------
Total assets .......................................... $ 51,963 $ 9,119
======== ========
Liabilities and Shareholders' Equity (Net
Capital Deficiency):
Current liabilities:
Accounts payable and accrued liabilities ................ 3,274 2,655
Accrued compensation .................................... 2,345 584
Deferred revenue ........................................ 7,782 5,439
Current portion of long-term debt........................ 75 455
-------- --------
Total current liabilities ............................. 13,476 9,133
Long-term note payable to shareholder ................... 125 125
Long-term debt .......................................... 71 595
Commitments
Shareholders' equity (net capital deficiency):
Convertible preferred stock, no par value, issuable in
series: 10,000,000 shares authorized; no shares and
2,643,269 shares issued and outstanding at
December 31, 2000 and December 31, 1999,
respectively.......................................... -- 9,378
Common stock, no par value: 110,000,000 shares
authorized; 24,254,283 and 14,349,607 shares issued
and outstanding at December 31, 2000 and December 31,
1999, respectively ................................... 51,388 1,290
Additional paid-in capital ................................ 3,838 2,451
Notes receivable from shareholders ........................ (468) (468)
Deferred stock-based compensation ......................... (2,657) (2,222)
Accumulated deficit........................................ (13,810) (11,163)
-------- --------
Total shareholders' equity (net capital deficiency) ... $ 38,291 $ (734)
-------- --------
$ 51,963 $ 9,119
======== ========
See accompanying notes.
F-3
SYNPLICITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December
31,
-------------------------
2000 1999 1998
------- ------- -------
Revenue:
License............................................. $25,006 $13,019 $ 8,373
Maintenance......................................... 9,584 5,156 2,655
------- ------- -------
Total revenue................................... 34,590 18,175 11,028
Cost of revenue:
Cost of license................................... 246 239 148
Cost of maintenance............................... 1,537 1,187 531
------- ------- -------
Total cost of revenue........................... 1,783 1,426 679
------- ------- -------
Gross profit........................................ 32,807 16,749 10,349
Operating expenses:
Research and development............................ 13,286 8,018 4,031
Sales and marketing................................. 18,293 12,903 8,317
General and administrative.......................... 3,570 2,586 1,620
Stock-based compensation(1)......................... 952 175 --
------- ------- -------
Total operating expenses........................ 36,101 23,682 13,968
------- ------- -------
Loss from operations............................ (3,294) (6,933) (3,619)
Interest income..................................... 770 133 58
Interest expense.................................... (123) (140) (77)
------- ------- -------
Net loss........................................ $(2,647) $(6,940) $(3,638)
======= ======= =======
Basic and diluted net loss per common share......... $ (0.16) $ (0.52) $ (0.29)
======= ======= =======
Shares used in per share calculation................ 16,115 13,227 12,451
======= ======= =======
- --------
(1) Amortization of deferred stock-based compensation relates to the following:
Years
Ended
December
31,
---------
2000 1999
---- ----
Cost of maintenance.................................................. $ 28 $ 5
Research and development............................................. 464 113
Sales and marketing ................................................. 403 55
General and administrative........................................... 57 2
---- ----
Total............................................................ $952 $175
==== ====
See accompanying notes.
F-4
SYNPLICITY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands)
Total
Convertible Notes Shareholders
Preferred Stock Common Stock Additional Receivable Deferred Equity (Net
----------------- --------------- Paid-in From Stock-based Accumulated Capital
Shares Amount Shares Amount Capital Shareholders Compensation Deficit Deficiency)
------- -------- ------- ------- ---------- ------------ ------------ ----------- ------------
Balance at December 31, 1997.. 889 $ 1,974 13,260 $ 496 $ 54 $ -- $ -- $ (585) $ 1,939
Issuance of common
stock to employees
upon exercise of
stock options....... -- -- 506 351 -- (312) -- -- 39
Net loss
(comprehensive
loss)............... -- -- -- -- -- -- -- (3,638) (3,638)
------- -------- ------- ------- ------ ------ ------- -------- -------
Balance at December 31, 1998.. 889 1,974 13,766 847 54 (312) -- (4,223) (1,660)
Issuance of Series B
preferred stock,
net of $96 of
issuance costs...... 1,754 7,404 -- -- -- -- -- -- 7,404
Issuance of common
stock upon exercise
of stock options.... -- -- 583 443 -- (156) -- -- 287
Deferred
compensation........ -- -- -- -- 2,397 -- (2,397) -- --
Amortization of
deferred stock-
based
compensation........ -- -- -- -- -- -- 175 -- 175
Net loss
(comprehensive
loss)............... -- -- -- -- -- -- -- (6,940) (6,940)
------- -------- ------- ------- ------ ------ ------- -------- -------
Balance at December 31, 1999.. 2,643 9,378 14,349 1,290 2,451 (468) (2,222) (11,163) (734)
Issuance of Series C
preferred stock,
net of $20 of
issuance costs...... 772 5,480 -- -- -- -- -- -- 5,480
Issuance of common
stock upon exercise
of stock options.... -- -- 856 1,480 -- -- -- -- 1,480
Issuance of common
stock upon
conversion of
preferred stock..... (3,415) (14,858) 4,304 14,858 -- -- -- -- --
Issuance of common
stock in connection
with initial public
offering, net of
$4,200 of issuance
costs............... -- -- 4,745 33,760 -- -- -- -- 33,760
Deferred stock-based
compensation........ -- -- -- -- 1,387 -- (1,387) -- --
Amortization of
deferred stock-
based
compensation........ -- -- -- -- -- -- 952 -- 952
Net loss
(comprehensive
loss)............... -- -- -- -- -- -- -- (2,647) (2,647)
------- -------- ------- ------- ------ ------ ------- -------- -------
Balance at December 31, 2000.. -- $ -- 24,254 $51,388 $3,838 $ (468) $(2,657) $(13,810) $38,291
======= ======== ======= ======= ====== ====== ======= ======== =======
See accompanying notes.
F-5
SYNPLICITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Operating activities
Net loss ....................................... $ (2,647) $ (6,940) $ (3,638)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ................................. 1,169 946 441
Amortization of deferred stock-based
compensation................................. 952 175 --
Loss on disposal of property and equipment ... -- -- 29
Changes in operating assets and liabilities:
Accounts receivable ........................ (2,811) (426) (1,979)
Other current assets ....................... (645) (350) 17
Other assets ............................... (322) (52) (202)
Accounts payable and accrued liabilities ... 619 1,629 641
Accrued compensation ....................... 1,761 (267) 371
Deferred revenue............................ 2,343 1,913 2,421
-------- -------- --------
Net cash provided by (used in) operating
activities............................... 419 (3,372) (1,899)
-------- -------- --------
Investing activities
Purchases of property and equipment ............ (1,645) (1,287) (1,551)
Purchases of short-term investments ............ (16,620) -- --
Purchases of long-term investments ............. (4,688) -- --
Maturities of short-term investments ........... 4,537 -- --
Proceeds from sale of property and equipment.... -- -- 50
-------- -------- --------
Net cash used in investing activities..... (18,416) (1,287) (1,501)
-------- -------- --------
Financing activities
Borrowing under revolving line of credit ....... 2,000 -- --
Repayment of revolving line of credit .......... (2,000) -- --
Proceeds from long-term debt.................... 201 -- 2,113
Payments on debt ............................... (1,105) (1,341) (123)
Proceeds from sale of common stock from option
exercises...................................... 1,480 286 39
Net proceeds from issuance of common stock in
initial public offering ....................... 33,760 -- --
Proceeds from issuance of preferred stock ...... 5,480 7,404 --
Proceeds from notes payable to officers ........ -- 400 250
Repayment of notes payable to officers.......... -- (650) --
-------- -------- --------
Net cash provided by financing
activities............................... 39,816 6,099 2,279
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................... 21,819 1,440 (1,121)
Cash and cash equivalents at beginning of
period......................................... 2,633 1,193 2,314
-------- -------- --------
Cash and cash equivalents at end of period ..... $ 24,452 $ 2,633 $ 1,193
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest ......................... $ 132 $ 136 $ 9
======== ======== ========
Supplemental schedule of noncash financing
activities
Issuance of common stock in exchange for notes
receivable from shareholders................... $ -- $ 156 $ 312
======== ======== ========
Deferred compensation related to stock options
............................................... $ 1,387 $ 2,397 $ --
======== ======== ========
See accompanying notes.
F-6
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Business
Synplicity, Inc. ("we" or "us") was incorporated on February 1, 1994 in the
State of California. We are a leading provider of software products that enable
the rapid and effective design and verification of large, complex
semiconductors used in internet infrastructure hardware, including next
generation networking and communications equipment, as well as various
electronic devices.
Principles of Consolidation
The consolidated financial statements include the accounts of our company
and our wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Foreign Currency Translation
The functional currency for our foreign subsidiaries is the United States
dollar. Monetary assets and liabilities denominated in foreign currencies are
translated at the year-end exchange rate. Property and equipment and non-
monetary assets and liabilities denominated in foreign currencies are
translated at historical rates. Adjustments resulting from these translations
are included in the results of operations and through December 31, 2000 have
been immaterial. We do not enter into foreign currency forward exchange
contracts.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results could differ from these estimates.
Concentration of Credit Risk
We distribute our products through our direct sales force and third-party
distributors principally in the United States, Europe and Japan. We generally
do not require collateral. We maintain reserves for potential credit losses,
and such losses to date have not been material.
No customer or distributor accounted for 10% or more of total revenues for
the years ended December 31, 2000 and 1999. One distributor accounted for 12%
of total revenue for the year ended December 31, 1998, and one customer
accounted for 11% of total revenue for the year ended December 31, 1998.
Export sales to customers outside of North America accounted for $7.1
million, $3.6 million and $2.1 million of our total revenue in the years ended
December 31, 2000, 1999 and 1998, respectively.
Cash Equivalents and Investments
All of our cash equivalents and investments are classified as available-for-
sale and are reported at fair value. Unrealized gains and losses (determined as
the difference between the recorded amount of the investment and its fair
value) are reported in stockholders' equity as a component of accumulated other
comprehensive income, net of tax, if any. The fair value of the investments is
based on quoted market prices. Realized gains and losses are included in
interest income. Investments that have maturities of three months or less at
the date of purchase are considered cash equivalents, investments that have
maturities between three and twelve months at the date of purchase are
considered short-term investments and investments that have maturities greater
than twelve months at the date of purchase are considered long-term
investments.
F-7
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three years to seven years.
Impairment of Long-Lived Assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("SFAS 121"), we review long-lived assets,
including property and equipment, for impairment whenever events or changes in
business circumstances indicate that the carrying amounts of the assets may not
be fully recoverable. Under SFAS 121, an impairment loss would be recognized
when estimated undiscounted future cash flows expected to result from the use
of the asset and its eventual disposition is less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows. Through December
31, 2000, we have not had any such losses.
Revenue Recognition
We sell perpetual licenses to use our software products and sell related
maintenance services. For each sale, we defer the recognition of revenue until
a purchase order is received from the customer, delivery of the product and
license key has occurred, the fee is fixed or determinable, collection of the
fee is probable based on completed credit review procedures, and there are no
remaining obligations by us. Once all of the above conditions have been met, we
recognize license revenue based upon the residual method after all elements
other than maintenance have been delivered as prescribed by Statement of
Position 98-9, Modification of SOP No. 97-2 with Respect to Certain
Transactions. Revenue on arrangements with extended payment terms, which have
met all other required revenue recognition criteria, are recognized as payments
become due. Sales to all distributors and resellers are recognized by us when
the distributor or reseller has resold the product to an end user.
Maintenance is offered to customers which requires us to perform continuing
service and support and allows customers to receive unspecified product
upgrades. In accordance with paragraph 10 of Statement of Position 97-2,
Software Revenue Recognition, vendor specific objective evidence of fair value
of maintenance is determined by reference to the price the customer will be
required to pay when maintenance is sold separately (that is, the renewal
rate), which is based on the price established by us and the history we have
developed of charging our customers for maintenance renewals. In general,
maintenance is priced at 20% of the list license price of the product. Under
the residual method, the list price of the maintenance is deferred and any
discount on the sale is allocated to the delivered elements. The maintenance
term is typically one year in duration and maintenance revenue is recognized
ratably over the maintenance term.
We have also provided a limited feature version of one of our products to
certain field programmable gate array ("FPGA") manufacturers for distribution
to their customers. As part of these agreements we have certain maintenance and
support obligations to the FPGA manufacturer. However, we have concluded that
we do not have vendor specific objective evidence of fair value of maintenance
on these type of arrangements as it is not priced or offered separately. As a
result, license and maintenance revenue is recognized ratably over the period
of each arrangement.
Product Development Costs
Product development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or
F-8
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Otherwise Marketed, requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on
our product development process, technological feasibility is established upon
completion of a working model. Costs we incurred between completion of the
working model and the point at which the product is ready for general release
have been insignificant. Therefore, all product development costs have been
charged to operations as incurred.
Advertising
Costs related to advertising are expensed as incurred. Advertising expense
for the years ended December 31, 2000, 1999 and 1998 was $659,000, $490,000 and
$316,000, respectively.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), we account for employee
stock based compensation in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations. Under APB 25, when the exercise price of our employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Any deferred stock compensation calculated according to APB 25 is amortized
over the vesting period of the individual options, generally four years, using
the graded vesting method. The graded vesting method provides for vesting of
portions for the overall awards at interim dates and results in greater vesting
in earlier years than straight-line.
All stock-based awards to non-employees are accounted for at their fair
value, as calculated using the Black-Scholes model, in accordance with SFAS 123
and Emerging Issues Task Force Consensus No. 96-18. Stock-based awards to non-
employees not immediately vested are subject to periodic re-valuation over
their vesting terms.
Stock Split
On July 27, 2000, we effected a two-for-three reverse split of our common
stock and preferred stock. All share and per share information included in
these financial statements have been adjusted to reflect this reverse stock
split.
Comprehensive Income (Loss)
We apply Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes rules for the reporting
and display of comprehensive income (loss) and its components, which includes
unrealized gains and losses on available-for-sale securities. For the years
ended December 31, 2000, 1999 and 1998, our comprehensive loss was the same as
net loss as there were no adjustments reported in shareholders' equity (net
capital deficiency) which were included in the computation.
Segment Information
We follow Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in interim financial reports. SFAS 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not affect
results of operations or financial position, as we operate in only one industry
segment.
F-9
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recently Issued Accounting Standards
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation ("FIN 44"), which contains rules designed to clarify the
application of APB 25. We adopted FIN 44 on July 1, 2000. The impact of
adoption of FIN 44 was not material to our operating results and financial
position.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We adopted SAB 101 in our fiscal
quarter beginning October 1, 2000. The adoption of SAB 101 had no impact to our
operating results and financial position.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"), which will be effective for the year ending December 31, 2001. This
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 of
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. We believe the adoption of SFAS 133 will not have
a material effect on our operating results or financial position, since we
currently do not invest in derivative instruments or engage in hedging
activities.
2. Financial Instruments
Available-for-sale securities consist of the following at December 31, 2000
(in thousands):
Cash equivalents:
Money market funds................................................ $ 9,420
U.S. government agency notes...................................... 9,997
Commercial paper.................................................. 3,963
-------
Total cash equivalents.......................................... $23,380
=======
Short-term investments:
U.S. government agency notes...................................... $ 8,012
Corporate notes................................................... 4,071
-------
Total short-term investments.................................... $12,083
=======
Long-term investments:
U.S. government agency notes...................................... $ 3,105
Corporate notes................................................... 1,583
-------
Total long-term investments..................................... $ 4,688
=======
Unrealized gains and losses on cash equivalents and investments were
immaterial for the periods presented.
F-10
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
--------------
2000 1999
------ ------
Computer hardware............................................ $2,365 $1,839
Computer software............................................ 768 586
Furniture and fixtures....................................... 1,557 791
Leasehold improvements....................................... 351 239
------ ------
5,041 3,455
Less accumulated depreciation................................ (2,575) (1,465)
------ ------
$2,466 $1,990
====== ======
4. Operating Lease Commitments
We lease our corporate facility in Sunnyvale, California and lease a number
of sales offices in various states as well as in certain other countries. In
October 1999, we entered into a new corporate facility lease expiring in
September 2002. Our old corporate facility lease was canceled without penalty
or further obligation. We also have operating leases for certain of our
equipment under an equipment lease financing agreement as described in Note 6.
Rent expense was $2.4 million, $875,000, and $451,000, for the years ended
December 31, 2000, 1999 and 1998, respectively. The future minimum commitments
under operating leases at December 31, 2000 are as follows (in thousands):
Year ending December 31,
------------------------
2001 ............................................................... $1,726
2002................................................................ 1,337
2003................................................................ 178
------
$3,241
======
5. Related Party Notes
In September 1998, we received two full-recourse notes receivable from one
of our officers with a principal amount totaling $312,000. The proceeds were
used to purchase shares of our common stock, which have been pledged as
collateral for the notes. Principal and interest are due and payable upon the
earlier of September 2003, when the corresponding stock is sold or 90 days
after the termination of the officer's employment with us. The notes accrue
interest at the rate of 5.5% per annum. The notes are accounted for in
shareholders' equity (net capital deficiency).
In November and December 1999, we received two full-recourse notes
receivable from one of our officers with a principal amount totaling $156,250.
The proceeds were used to purchase shares of our stock which have been pledged
as collateral for the notes. Principal and interest are due and payable upon
the earlier of five years from the date of the notes, when the corresponding
stock is sold, or 90 days after the termination of the officer's employment
with us. The notes accrue interest at the rate of 6.2% per annum. The notes are
accounted for in shareholder's equity (net capital deficiency).
In November 1995, we issued a note payable to a shareholder with a principal
amount of $125,000. All principal is due and payable on October 31, 2002.
Simple interest of 6.11% is due at the end of each calendar year.
F-11
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt
Long-term debt consists of the following (in thousands):
December
31,
------------
2000 1999
---- ------
Equipment advance.............................................. $ -- $ 917
Straight line of credit........................................ -- 133
Equipment lease................................................ 146 --
---- ------
146 1,050
---- ------
Less current portion........................................... (75) (455)
---- ------
Noncurrent portion............................................. $ 71 $ 595
==== ======
In April 1997, we entered into a business loan agreement with a commercial
bank which was amended in September 1998. The agreement provides for a $3
million revolving line of credit, a $1 million equipment advance and a $400,000
straight line of credit. The lines of credit are collateralized by
substantially all of our assets other than equipment purchased with the
equipment advance. Under the terms of the agreement, we are required to
maintain certain financial covenants. As of December 31, 2000, we were in
compliance with each of the required covenants.
The revolving line of credit agreement allows us to borrow up to $3 million.
Borrowings under this line of credit bear interest at the bank's prime rate and
there was no outstanding debt related to this line of credit at December 31,
2000 or 1999.
The equipment advance allowed us to borrow up to $1 million, subject to
certain limits based on financial covenants. We borrowed on this line until
September 1999. Interest accrued from the date of each equipment advance and
was payable monthly until September 1999 at which time all outstanding
equipment advances became payable in 36 equal monthly installments of
principal, plus accrued interest. Borrowings under the equipment advance bear
interest at the bank's prime rate plus 0.25%. We utilized all $1 million of the
equipment advance. At December 31, 1999, the interest rate was 8.75% and
$917,000 was outstanding. During 2000, we repaid the remaining principal
balance.
The straight line of credit agreement allowed us to borrow up to $400,000 to
purchase equipment. Such borrowings under this line of credit bear interest at
the bank's prime rate plus 0.5% and are payable in 36 monthly payments of
principal plus interest beginning January 31, 1998. We utilized $400,000 of
this line. At December 31, 1999, the interest rate was 9% and $133,000 was
outstanding. During 2000, we repaid the remaining principal balance.
In November 1999, we entered into an equipment lease financing agreement
with a lessor that provides for leasing of up to $1.5 million of equipment,
including up to $450,000 of software and tenant improvements. All scheduled
leases are payable in 36 equal monthly installments. Based on the terms of the
individual leases, the leases are treated as either operating or capital. All
operating leases are included in Note 4. Additionally, we granted the lessor
fully vested warrants to purchase up to 14,035 shares of common stock at $4.28
per share. At December 31, 2000, $146,000 of capital leases were outstanding
under this agreement (none outstanding in 1999). The equipment capitalized
under this agreement had a cost of approximately $201,000 and accumulated
depreciation of approximately $84,000 as of December 31, 2000. As of December
31, 2000 the availability of additional borrowings under this agreement was
terminated.
F-12
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future principal payments at December 31, 2000 under all long-term debt are
as follows (in thousands):
Year ending December 31,
------------------------
2001.................................................................. $ 75
2002.................................................................. 71
----
$146
====
7. Net Loss Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
basic net loss per share has been computed using the weighted-average number
of shares of common stock outstanding during the period, less the weighted-
average number of shares of common stock that are subject to repurchase.
Diluted net loss per share includes the impact of options and warrants to
purchase common stock, if dilutive. There is no difference between our basic
and diluted net loss per share as we incurred a net loss for each period
presented. Pro forma basic and diluted net loss per share, as presented below,
is unaudited and has been computed as described above and also gives effect,
under Securities Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
Years Ended December
31,
-------------------------
2000 1999 1998
------- ------- -------
Net loss ........................................ $(2,647) $(6,940) $(3,638)
======= ======= =======
Basic and diluted weighted average shares:
Weighted-average shares of common stock
outstanding .................................. 16,833 14,098 13,548
Less: weighted-average shares subject to
repurchase ................................... (718) (871) (1,097)
------- ------- -------
Weighted-average shares used in computing basic
and diluted net loss per share ............... 16,115 13,227 12,451
======= ======= =======
Basic and diluted net loss per common share ..... $ (0.16) $ (0.52) $ (0.29)
======= ======= =======
Pro forma (unaudited):
Shares used above ............................. 16,115 13,227 12,451
Pro forma adjustment to reflect weighted effect
of assumed conversion of convertible preferred
stock ........................................ 3,165 3,205 1,778
------- ------- -------
Shares used in computing pro forma basic and
diluted net loss per share.................... 19,281 16,432 14,229
------- ------- -------
Pro forma basic and diluted net loss per common
share (unaudited) .............................. $ (0.14) $ (0.42) $ (0.26)
======= ======= =======
We have excluded all convertible preferred stock, warrants, outstanding
stock options and shares subject to repurchase by us from the calculation of
diluted loss per share because all such securities are antidilutive for all
periods presented. Weighted average options and warrants outstanding to
purchase 4,242,464, 4,023,277 and 2,889,987 shares of common stock for the
years ended December 31, 2000, 1999 and 1998, respectively, were not included
in the computation of diluted net loss per share because the effect would be
antidilutive. Such securities, had they been dilutive, would have been
included in the computation of diluted net loss per share using the treasury
stock method. The weighted-average exercise prices of these securities were
$2.71, $1.67 and $1.10 as of December 31, 2000, 1999 and 1998, respectively.
F-13
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Shareholders' Equity
Preferred Stock
Convertible preferred stock is issuable in series, with rights and
preferences designated by series. Concurrent with the closing of the initial
public offering of our common stock in October 2000, all of the then
outstanding shares of Series A, B and C preferred stock automatically converted
into 4,304,092 shares of common stock. At December 31, 2000, there are no
shares outstanding, and 10,000,000 shares authorized for issuance. The shares
outstanding at December 31, 1999 were as follows:
December 31, 1999
----------------------------------
Shares
Shares Issued and Liquidation
Authorized Outstanding Preference
---------- ----------- -----------
Series A.................................. 1,333,332 888,885 $1,999,998
Series B.................................. 2,731,579 1,754,384 7,500,000
Series C.................................. -- -- --
--------- --------- ----------
4,064,911 2,643,269 $9,499,998
========= ========= ==========
Convertible Series A Preferred Stock
In October 1996, we sold 888,885 shares to private investors at an aggregate
price of $2 million, subject to certain antidilution privileges. Each share of
Series A preferred stock was convertible into two shares of common stock at the
option of the holder. Conversion was automatic upon the closing of the initial
public offering of our common stock in October 2000.
Convertible Series B Preferred Stock
In March 1999, we sold 1,754,384 shares of convertible Series B preferred
stock to investors at $4.28 per share for an aggregate price of $7.5 million.
Each share of Series B preferred stock was convertible into one share of common
stock at the option of the holder, subject to certain antidilution adjustments.
Conversion was automatic upon the closing of the initial public offering of our
common stock in October 2000.
Convertible Series C Preferred Stock
In March 2000, we sold 771,929 shares of convertible Series C preferred
stock to investors at $7.13 per share for an aggregate price of $5.5 million.
Each share of Series C preferred stock was convertible into one share of common
stock at the option of the holder, subject to certain antidilution adjustments.
Conversion was automatic upon the closing of the initial public offering of our
common stock in October 2000.
Common Stock
In April 2000, our Board of Directors and shareholders approved an amendment
to our articles of incorporation to authorize us to issue up to 110,000,000
shares of our common stock.
In October 2000, we sold 4,300,000 shares of common stock in an initial
public offering at a price of $8.00 per share. We sold an additional 445,000
shares of common stock at a price of $8.00 per share in November 2000 to cover
over-allotments. Net proceeds from all shares sold, less underwriting discounts
and related expenses, was approximately $33.7 million.
We sold 1,560,668 shares of common stock to employees in connection with
Restricted Stock Purchase Agreements. These agreements allow us to repurchase
unvested shares in the event that the employee is no longer employed by us. As
of December 31, 2000 and 1999, 330,483 shares and 750,529 shares, respectively,
were subject to repurchase.
F-14
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We have reserved shares of common stock for issuance at December 31, 2000 as
follows:
Stock Options:
Options outstanding.............................................. 4,776,615
Reserved for future grants....................................... 2,632,666
Employee Stock Purchase Plan....................................... 666,666
Warrants outstanding............................................... 14,035
---------
8,089,982
=========
Stock Options
As described below, we have three stock option plans (the "Option Plans")
under which incentive stock options and/or nonstatutory options may be granted
to our employees, consultants, and directors. Options are granted under the
Option Plans at prices not less than the fair value on the date of the grant.
Stock options to new employees generally become exercisable 25% after one year
and on a ratable basis over the subsequent 36 months. The options generally
expire in ten years. However, in the case of incentive stock options granted to
an optionee who, at the time the option is granted, owns stock representing
more than 10% of the voting power of all classes of our stock, the term of the
option is five years from the date of grant.
Under the 1995 Stock Option Plan (the "1995 Plan") we were authorized to
issue 7,400,000 shares of common stock for the grant of options. In 2000, our
Board of Directors approved the termination of the 1995 Plan as to future
option grants to be effective upon the completion of an initial public offering
of our common stock. As a result of the initial public offering of our common
stock in October 2000, the remaining 200,207 authorized shares available for
grant out of the 1995 Plan expired. In the future, any options from the 1995
Plan that are canceled will not be available for re-grant.
In 2000, our Board of Directors adopted the 2000 Stock Option Plan (the
"2000 Plan") and authorized 2,666,666 shares for grant under the 2000 Plan. The
authorized shares available for issuance will be increased on the first
business day of each year, beginning January 1, 2001, equal to the least of
2,333,333 shares, 5% of the outstanding shares of common stock on the last day
of the prior fiscal year or such amount as may be determined by our Board.
In 2000, our Board of Directors adopted the 2000 Director Option Plan (the
"Director Plan") and authorized 100,000 shares for grant under the Director
Plan. Each nonemployee director who becomes one of our directors will
automatically be granted a nonstatutory stock option to purchase 40,000 shares
of common stock on the date on which such person first becomes a director. At
the first board meeting following each annual shareholders meeting, beginning
with the first board meeting after the first annual shareholders meeting, each
nonemployee director then in office for over six months will automatically be
granted a nonstatutory option to purchase an additional 10,000 shares of common
stock. The Director Plan will terminate in April 2010, unless terminated
earlier in accordance with the provisions of the Director Plan. In addition,
the Director Plan provides for annual increases in the number of shares
available for issuance on the first business day of each year, beginning
January 1, 2001, equal to the least of 100,000 shares, fifteen one hundredths
of one percent of the outstanding shares of common stock on the last day of the
prior fiscal year or such amount as may be determined by our Board.
F-15
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity under the Option Plans is as follows:
Options Outstanding
---------------------------------
Weighted-
Shares Exercise Average
Available Number of Price Per Exercise
for Grant Shares Share Price
---------- --------- ------------ ---------
Balance at December 31,
1997....................... 1,071,600 1,401,314 $0.02-$ 0.30 $0.17
Additional authorization.... 1,666,666 -- -- --
Options granted............. (2,090,710) 2,090,710 $0.90-$ 2.55 $1.62
Options exercised........... -- (506,312) $0.02-$ 1.80 $0.71
Options canceled............ 95,725 (95,725) $0.15-$ 1.80 $0.95
---------- ---------
Balance at December 31,
1998....................... 743,281 2,889,987 $0.02-$ 2.55 $1.10
Additional authorization.... 2,000,000 -- -- --
Options granted............. (1,341,379) 1,341,379 $1.88-$ 3.75 $2.35
Options exercised........... -- (582,894) $0.02-$ 2.55 $0.75
Options canceled............ 313,892 (313,892) $0.02-$ 2.25 $1.04
---------- ---------
Balance at December 31,
1999....................... 1,715,794 3,334,580 $0.02-$ 3.75 $1.67
Additional authorization.... 2,766,666 -- -- --
Options granted............. (1,948,974) 1,948,974 $5.10-$14.38 $8.20
Options exercised........... -- (855,548) $0.15-$ 6.00 $1.73
Options canceled............ 299,387 (299,387) $0.15-$11.00 $2.91
Authorized shares expired... (200,207) -- -- --
---------- ---------
Balance at December 31,
2000....................... 2,632,666 4,128,619 $0.15-$14.38 $2.70
========== =========
In December 1999, we granted options to purchase an aggregate of 674,662
shares of common stock at an exercise price of $3.75 per share, that were
outside of the Option Plan. As of December 31, 2000 and 1999, 647,996 and
674,662 of these options were outstanding, respectively.
The following table summarizes information about all stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
(In years)
$0.15-$0.90............. 532,597 6.45 $ 0.48 418,595 $0.44
$1.20-$1.88............. 778,343 7.68 $ 1.75 278,548 $1.69
$1.95-$2.93............. 993,314 8.45 $ 2.44 316,984 $2.39
$3.75-$6.45............. 1,281,864 9.15 $ 4.74 10,623 $3.80
$6.75-$9.90............. 663,079 9.59 $ 8.33 -- --
$10.45-$14.38........... 527,418 9.75 $11.38 -- --
--------- ---------
4,776,615 8.59 $ 4.53 1,024,750 $1.64
========= =========
F-16
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
During the years ended December 31, 2000 and 1999, we recorded deferred
compensation of $1,387,000 and $2,397,000, respectively, representing the
difference between the exercise prices and the deemed fair value of our common
stock on the dates these stock options were granted. The total deferred
compensation of $3,784,000 is being amortized by charges to operations on a
graded vesting method over the vesting periods of the respective options,
generally four years. We recorded amortization of deferred compensation expense
of approximately $952,000 and $175,000 for the years ended December 31, 2000
and 1999. At December 31, 2000, we had a total of $2,657,000 remaining to be
amortized over the corresponding vesting period of each respective option,
generally four years. The remaining deferred stock compensation at December 31,
2000 is expected to be amortized as follows: $1,045,000 for the year ending
December 31, 2001, $753,000 for the year ending December 31, 2002, and $859,000
for the year ending December 31, 2003 and the balance thereafter. Subsequent
terminations of option holders may reduce future stock-based compensation.
We have elected to follow APB 25 and related interpretations in accounting
for our employee stock-based compensation plans. Because the exercise price of
our employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is generally recognized. Pro forma
information regarding net loss has been determined as if we had accounted for
our employee stock options under the fair value method prescribed by SFAS 123.
The resulting effect on pro forma net loss disclosed is not likely to be
representative of the effects on net loss on a pro forma basis in future years,
due to additional grants and years of vesting in subsequent years. For the year
ended December 31, 2000, the fair value of our stock-based awards to employees
was estimated at the date of grant using the Black-Scholes option pricing
model. For the years ended December 31, 1999 and 1998, the fair value of our
stock-based awards to employees was estimated at the date of grant using the
minimum value method. For each of the three years ended December 31, 2000, the
following weighted-average assumptions were used in the estimations:
Years Ended
December 31,
-------------------
2000 1999 1998
----- ----- -----
Expected life (years)................................... 4 4 4
Volatility.............................................. 75% 0% 0%
Risk-free interest rate................................. 6% 6% 6%
Dividend yield.......................................... -- -- --
Weighted average fair value of options granted.......... $4.95 $0.72 $0.35
For pro forma purposes, the estimated fair value of our stock-based awards
to employees is amortized over the options' vesting period. Pro forma
information follows (in thousands, except per share data):
Years Ended December
31,
-------------------------
2000 1999 1998
------- ------- -------
Net loss:
As reported .................................... $(2,647) $(6,940) $(3,638)
======= ======= =======
Pro forma ...................................... $(4,083) $(7,192) $(3,768)
======= ======= =======
Net loss per share:
As reported .................................... $ (0.16) $ (0.52) $ (0.29)
======= ======= =======
Pro forma ...................................... $ (0.25) $ (0.54) $ (0.30)
======= ======= =======
The fair value of options granted to consultants were determined using the
Black-Scholes model with the following weighted average assumptions: risk-free
interest rate of 6%, contractual life of 4-10 years, dividend yield of zero and
expected volatility of 60%. The resulting compensation expense was immaterial.
F-17
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 Employee Stock Purchase Plan
In April 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 666,666 shares of our common
stock were reserved for issuance under the Plan. The Purchase Plan permits
eligible employees to purchase common stock at a discount up to a maximum of
12% of compensation through payroll deductions during defined offering periods.
The price at which stock is purchased under the Purchase Plan is equal to 85%
of the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. The initial trading period will commence
on the effective date of our initial public offering and will end in April
2002. In addition, the Purchase Plan provides for annual increases in the
number of shares available for issuance under the Purchase Plan on the first
business day of each year, beginning January 1, 2001, equal to the lesser of
666,666 shares, 2.0% of the outstanding shares of common stock on the last day
of the prior fiscal year or such amount as may be determined by the Board.
9. Income Taxes
We have incurred losses for both income tax and financial statement purposes
for all periods reported. Accordingly, no provision for income taxes has been
recorded.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income/(loss) before income taxes. The
sources and tax effects of the difference are as follows (in thousands):
2000 1999 1998
----- ------- -------
Expected tax at 35%.....................................$(926).$(2,429).$(1,273)
Unbenefited losses..................................... 926 2,429 1,273
----- ------- -------
Total provision........................................ $ -- $ -- $ --
===== ======= =======
As of December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $10 million and $400,000, respectively. The
federal and state net operating loss carryforwards will expire beginning in
2012 and 2002, respectively, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of deferred tax assets are
as follows (in thousands):
December 31,
--------------
2000 1999
------ ------
Deferred tax assets:
Net operating loss carryforwards........................... $3,400 $3,200
Research credit carryforwards (federal and state).......... 1,400 800
Capitalized research expenses.............................. 600 500
Other...................................................... 800 300
------ ------
Total deferred tax assets.................................... 6,200 4,800
Valuation allowances......................................... (6,200) (4,800)
------ ------
Net deferred taxes........................................... -- --
====== ======
F-18
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net valuation allowance increased by approximately $1.4 million and $2.9
million during the years ended December 31, 2000 and 1999, respectively.
10. Industry and Geographic Segment Information
The following table presents enterprise-wide sales to external customers and
long-lived assets by geographic areas (in thousands):
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
Total revenues:
United States..................................... $27,447 $14,550 $ 8,941
Europe, Middle East............................... 4,505 1,728 725
Asia.............................................. 2,638 1,897 1,362
------- ------- -------
$34,590 $18,175 $11,028
======= ======= =======
Long-lived assets (at period end):
United States..................................... $ 2,255 $ 2,178 $ 1,904
Europe, Middle East............................... 219 166 52
Asia.............................................. 673 5 --
------- ------- -------
$ 3,147 $ 2,349 $ 1,956
======= ======= =======
Revenues by geographic area are based on the location of customers.
11. Employee Benefit Plan
We have a 401(k) Plan in which all United States employees age 21 or over
are eligible to participate. Participants may defer up to 15% of their gross
salary into the Plan, subject to certain Plan restrictions. We provide matching
contributions of 50% of the first 4% contributed by the participants up to a
maximum of $1,000 per employee per year, totaling $150,000, $120,000 and
$107,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
12. Legal Proceedings
From time to time, we are subject to legal proceedings and claims in the
ordinary course of business. We are not currently aware of any legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, results of operations and
financial condition.
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Synplicity, Inc.
/s/ Bernard Aronson
By: _________________________________
Bernard Aronson
President, Chief Executive
Officer and Director
Date: March 27, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bernard Aronson and Douglas S. Miller, his or
her true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, to sign any and all amendments (including post-effective
amendments) to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, or any of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Bernard Aronson President, Chief Executive March 27, 2001
______________________________________ Officer and Director
Bernard Aronson (Principal Executive
Officer)
/s/ Douglas S.Miller Vice President of Finance March 27, 2001
______________________________________ and Chief Financial
Douglas S. Miller Officer (Principal
Accounting Officer)
/s/ Kenneth S. McElvain Chief Technology Officer, March 27, 2001
______________________________________ Vice President and
Kenneth S. McElvain Director
/s/ Alisa Yaffa Chairman of the Board, March 27, 2001
______________________________________ Vice President of
Alisa Yaffa Intellectual Property and
Secretary
/s/ Prahbu Goel Director March 27, 2001
______________________________________
Prahbu Goel
/s/ Kevin G. Hall Director March 27, 2001
______________________________________
Kevin G. Hall
/s/ Scott J. Stallard Director March 27, 2001
______________________________________
Scott J. Stallard
II-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Additions Balance at
Beginning of Charged to End of
Period Expense Period
------ ------- ------
Allowance for Doubtful
Accounts:
2000 $395 $92 $487
1999 $315 $80 $395
1998 $224 $91 $315
INDEX TO EXHIBITS
Exhibits
---------
3.1.1* Articles of Incorporation of the Registrant
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2* Amended and Restated Registration Rights Agreement dated March 31, 2000 by and among the
Registrant and certain shareholders of the Registrant
10.1* Form of Indemnification Agreement between the Registrant and each of its directors and officers
10.2* Amended and Restated 1995 Stock Option Plan
10.2.1* Form of Option Agreement under the 1995 Stock Option Plan
10.3* 2000 Stock Option Plan
10.3.1* Form of Option Agreement under the 2000 Stock Option Plan
10.4* 2000 Director Option Plan
10.4.1* Form of Option Agreement under 2000 Director Option Plan
10.5* 2000 Employee Stock Purchase Plan
10.5.1* Form of Subscription Agreement under the 2000 Employee Stock Purchase Plan
10.6* Promissory Note dated November 7, 1995 between Registrant and Andreas Bechtolsheim
10.7*+ Authorized International Distributor Agreement dated February 13, 1996 between Registrant and
Pacific Design, Inc.
10.8* Employment Agreement dated November 22, 1996 between Registrant and Andrew Haines
10.9*+ Software OEM License Agreement dated December 23, 1997 by and among Registrant, Cadence
Design Systems, Inc. and Cadence Design Systems (Ireland) Limited
10.9.1* Amendment 1 to Software OEM License Agreement dated August 1, 1998 by and among
Registrant, Cadence Design Systems, Inc. and Cadence Design Systems (Ireland) Limited
10.9.2*+ Amendment 2 to Software OEM License Agreement dated December 17, 1999 by and among
Registrant, Cadence Design Systems, Inc. and Cadence Design Systems (Ireland) Limited
10.10* Employment Agreement dated June 19, 1997 between Registrant and Bernard Aronson
10.11* Employment Agreement dated April 17, 1998 between Registrant and Robert J. Erickson
10.12* Promissory Note and Security Agreement dated September 3, 1998 between Registrant and
Robert J. Erickson
10.13* Employment Agreement dated October 1, 1998 between Registrant and Douglas S. Miller
10.14*+ Distributor Agreement dated April 1, 1999 between Registrant and Insight Enterprises Inc.
10.14.1 Addendum 4 to Distributor Agreement dated April 1, 1999 between Registrant and Insight Enterprises Inc.
10.15* Sublease dated August 25, 1999 between Registrant and Proxim, Inc. for the 935 Stewart Drive,
Sunnyvale, California office
10.16* Sublease dated October 18, 1999 between Registrant and HRG, Inc., The Human Resource Group
for the 17055 Via del Campo, Office 109, San Diego, California office
10.17* Lease dated July 15, 1999 between Registrant and Anthony Buxton and R. Robert Reading,
Trustees of Tactician Realty Trust for the 305 North Main Street, Andover, Massachusetts office
10.18* Promissory Note and Security Agreement dated November 29, 1999 between Registrant and
Douglas S. Miller
10.19* Promissory Note and Security Agreement dated December 28, 1999 between Registrant and
Douglas S. Miller
10.20* Lease dated January 27, 2000 between Registrant and Information Technology Park Ltd. for the
International Tech Park, Bangalore, India office
10.21* Lease dated June 1, 2000 between Registrant and Becker Family Limited Partnership for the
8217 Shoal Creek Blvd., Austin, Texas office
10.22*+ Distribution Agreement dated April 1, 1999 between Registrant and Wyle Electronics
10.22.1 Addendum 3 to Distribution Agreement dated April 1, 1999 between Registrant and Wyle Electronics
10.23* Amended and Restated Loan Security Agreement dated September 9, 1998 between Registrant
and Silicon Valley Bank
10.23.1* Loan Modification Agreement dated December 15, 1999 between Registrant and Silicon Valley
Bank
Exhibits
--------
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (Reference on II-1)
___________________
+ Portions of the exhibit have been omitted pursuant to a request for
confidential treatment and the omitted portions have been separately
filed with the Commission.
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-42146) as declared effective by the Securities and Exchange
Commission on October 12, 2000.