<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
December 23, 1998
ASPEC TECHNOLOGY, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
<TABLE>
<S> <C>
000-22565 77-0298386
- --------------------- ------------------------------------
(Commission File No.) (IRS Employer Identification Number)
</TABLE>
830 East Arques Avenue
Sunnyvale, California 94086
----------------------------------------
(Address of principal executive offices)
(408) 774-2199
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
Item 5. Other Events.
On October 9, 1998, the Registrant announced it would restate its
financial results for fiscal years 1996 and 1997. The purpose of this filing is
to file the Company's audited financial statements for such years.
Item 7. Exhibits.
(c) Exhibits.
Financial Statements for the fiscal years ended November 30, 1996
and 1997, audited by PricewaterhouseCoopers LLP.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Aspec Technology, Inc.
Dated: December 23, 1998 By: /S/ Conrad Dell'Oca
------------------------------------
Conrad Dell'Oca,
Chief Executive Officer
<PAGE> 4
ASPEC TECHNOLOGY
Financial Statements
November 30, 1997 and 1996
<PAGE> 5
Aspec Technology, Inc.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Accountants Report.......................................... 2
Consolidated Balance Sheets............................................. 3
Consolidated Statements of Income....................................... 4
Consolidated Statements of Stockholders' Equity (Deficiency)............ 5
Consolidated Statements of Cash Flows................................... 6
Note to Consolidated Financial Statements............................... 7
</TABLE>
-1-
<PAGE> 6
INDEPENDENT ACCOUNTANT'S REPORT
December 17, 1998
To the Board of Directors
Aspec Technology, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity (deficiency) and cash
flows present fairly, in all material respects, the consolidated financial
position of Aspec Technology, Inc. and subsidiary as of November 30, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the two years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 13 to the consolidated financial statements, the Company
has restated its 1997 and 1996 financial statements (previously audited by other
independent auditors).
/s/ PricewaterCoopers LLP
-2-
<PAGE> 7
ASPEC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------
1997 1996
---------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 2,524 $ 6,341
Accounts receivable (net of allowances of $300 in 1997 and 1996)
Billed 3,943 5,620
Unbilled 853 121
Prepaid expenses 507 586
Deferred income taxes 2,730 504
-------- --------
Total current assets 10,557 13,172
Property and equipment - net 4,105 2,478
Other assets 243 216
-------- --------
TOTAL $ 14,905 $ 15,866
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable $ 801 $ 941
Accrued liabilities 2,379 1,937
Income taxes payable 321 2,050
Customer advances 3,979 4,700
-------- --------
Total current liabilities 7,480 9,628
======== ========
Committments and contingencies (Notes 5 and 6)
Series A redeemable preferred stock, $.001 par value:
130 shares designated and outstanding (liquidation
value: $18,495) 14,168 13,345
Redeemable common stock, $.001 par value; shares
outstanding 1996 and 1997 - 4,779 7,116 7,116
Stockholders' equity (deficiency):
Preferred stock, $.001 par value; 5,000 authorized (excluding Series A
redeemable preferred stock); none outstanding -- --
Common stock, $.001 par value; 75,000 shares
authorized shares outstanding: 1996 - 17,941;
1997 - 17,234 2,914 3,344
Stockholders notes receivable (301) (648)
Deferred stock compensation (165) (476)
Retained earnings (deficit) (16,307) (16,443)
-------- --------
Total stockholders' deficiency (13,859) (14,223)
-------- --------
TOTAL $ 14,905 $ 15,866
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE> 8
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1997 1996
------- -------
<S> <C> <C>
Revenue $20,278 $14,999
Cost of revenue 8,763 4,702
------- -------
Gross profit 11,515 10,297
------- -------
Operating expenses:
Research and development 1,190 921
Sales and marketing 6,537 3,526
General and administrative 2,363 1,994
------- -------
Total operating expenses 10,090 6,441
======= =======
Income from operations 1,425 3,856
Interest income 173 310
------- -------
Income before income taxes 1,598 4,166
Provision for income taxes 639 1,708
------- -------
Net income 959 2,458
Accretion of redeemable preferred stock 823 392
------- -------
Income attributable to common stockholders $ 136 $2,066
======= =======
Basic earnings per share $ 0.01 $ 0.10
======= =======
Basic average shares outstanding 21,365 21,064
======= =======
Diluted earnings per share $ 0.01 $ 0.09
======= =======
Diluted average shares outstanding 22,585 22,397
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE> 9
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON REDEEMABLE TOTAL
COMMON STOCK STOCKHOLDER DEFERRED RETAINED STOCKHOLDERS'
---------------------- NOTES STOCK EARNINGS EQUITY
SHARES AMOUNT RECEIVABLE COMPENSATION (DEFICIT) (DEFICIENCY)
--------- ------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 1, 1995 18,929 $ 114 $ -- $ -- $ 1,684 $ 1,798
Sale of common stock (net of --
costs of $260) 508 1,900 -- -- -- 1,900
Issuance of common stock under --
stock purchase plan 3,293 1,346 (648) (582) -- 116
Repurchase of common stock --
from founders and employees (4,789) (16) -- -- (20,193) (20,209)
Accretion of redeemable --
preferred stock -- -- -- -- (392) (392)
Amortization of deferred stock --
compensation -- -- -- 106 -- 106
Net income -- -- -- -- 2,458 2,458
------- ------- ---------- -------- ------- -------
Balances, November 30, 1996 17,941 3,344 (648) (476) (16,443) (14,223)
Issuance of common stock under
stock option plans 2 10 -- -- -- 10
Repurchase of common stock
from employees (709) (440) 239 197 -- (4)
Accretion of redeemable
preferred stock -- -- -- -- (823) (823)
Collection of stockholders notes
receivable -- -- 108 -- -- 108
Amortization of deferred stock
compensation -- -- -- 114 114
Net income -- -- -- -- 959 959
======= ======= ========== ======== ======== ========
Balances, November 30, 1997 $17,234 $ 2,914 $ (301) $ (165) $(16,307) $(13,859)
======= ======= ========== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE> 10
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 959 $ 2,458
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,570 737
Deferred Income taxes (2,226) (422)
Stock compensation expense 114 106
Changes in assets and liabilities
Accounts receivable: 945 (3,949)
Prepaid expenses and other assets 52 (699)
Accounts payable (140) 845
Accrued liabilities 442 1,269
Income taxes payable (1,729) 964
Customer advances (721) 3,302
-------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (734) 4,611
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,197) (2,463)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 10 2,016
Sale of redeemable common stock -- 7,116
Sale of redeemable preferred stock -- 12,953
Repurchase of common stock (4) (20,209)
Collection of stockholder notes receivable 108 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 114 1,876
-------- --------
Net increase (decrease) in cash and equivalents (3,817) 4,024
Cash and equivalents, beginning of period 6,341 2,317
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 2,524 $ 6,341
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 4,594 $ 1,166
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for notes receivable $ -- $ 648
-------- --------
Accretion of redeemable preferred stock $ 823 $ 392
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE> 11
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business -- Aspec Technology, Inc. (the "Company") is a leading provider
of merchant semiconductor intellectual property ("SIP") solutions for
high-performance, complex IC designs, including system-on-a-chip ICs.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary.
Intercompany accounts and transactions are eliminated.
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates,
and such differences may be material to the financial statements.
Cash Equivalents -- Cash equivalents consist of short-term highly liquid
debt investments with original maturities of 90 days or less.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated useful lives, generally three to five
years.
Software Development Costs -- Development costs incurred in the research
and development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established, at which time certain development costs required to attain general
production release would be capitalized. To date, the Company's software
development has essentially been completed concurrent with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.
Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and equivalents and accounts receivables. Cash equivalents consist primarily of
money market instruments carried at cost, which approximates fair market value.
Management believes the credit risk associated with such instruments is minimal.
Revenue Recognition -- A majority of the Company's license revenue has
been recognized on a percentage of completion basis based upon actual costs
incurred since Aspec's products typically involve levels of adaptation or
completion. License terms typically include a payment upon execution of the
agreement with further payments upon completion of milestones. Revenue is
recognized ratably as the work is performed on the project. Billings in excess
of revenue are recorded as customer advances, while revenue in excess of
billings is recorded as unbilled receivables. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. The time required to adapt a product for a specific customer
application generally ranges from three to twelve months. License revenue for
products not requiring adaptation is recognized upon delivery and when
collection is reasonably assured.
-7-
<PAGE> 12
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from support and maintenance contracts is deferred as customer
advances and recognized ratably over the term of the agreement, which is
typically one year. Royalty revenues are earned and recognized in the period
reported by the customer or when cash is received.
Income Taxes -- The Company accounts for income taxes using the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities.
Stock Compensation -- The Company accounts for stock-based awards
granted to employees based on the intrinsic value method in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (see Note 8).
Earnings Per Share -- During fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). All
earnings per share (EPS) data for prior periods have been restated to conform
with SFAS 128.
SFAS 128 requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income attributable to
common stockholders by the weighted average common shares less shares subject to
repurchase rights outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Recent Pronouncements -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. It does not require a
specific format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in the financial
statement. SFAS No. 130 is effective for the Company's 1999 fiscal year that
commenced December 1, 1998. The pronouncement will not have a material impact on
the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to stockholders. SFAS no. 131 is
effective for the Company's 1999 fiscal year that commenced December 1, 1998.
The pronouncement will not have a material impact on the Company.
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which is effective for fiscal years beginning after December 15,
1998. SOP 98-1 provides guidance on accounting for costs of computer software
developed or obtained for internal use. The pronouncement will not have a
material impact on the Company.
-8-
<PAGE> 13
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS RISKS AND CREDIT CONCENTRATIONS
The Company operates in an intensely competitive industry that has been
characterized by rapid technological change, short product life cycles, cyclical
market patterns and heightened foreign and domestic competition. Significant
technological changes in the industry could affect operating results adversely.
The Company markets and sells its technology to a narrow base of
customers which are primarily designers and manufacturers of integrated
circuits, and generally does not require collateral. At November 30, 1997, three
customers accounted for 15%, 15% and 13% of gross accounts receivables. At
November 30, 1996, two customers accounted for 17% and 12% of gross accounts
receivables. A significant portion of the Company's revenues are derived from
customers in Asia, a region experiencing economic volatility. The Company has
experienced a lengthening of the payment period for accounts receivables from
certain Asian-based customers. At November 30, 1997, approximately 67.3% of the
Company's accounts receivable (including unbilled receivables) were from
Asian-based customers. Although the Company currently believes, based in part on
continuing discussions with these customers, that its existing accounting
reserves are adequate given the estimated exposure related to all of its
accounts receivable, there can be no assurance that such accounting reserves
will prove to be adequate nor that present or future dislocations in Asian
countries or elsewhere or other factors will not have a material adverse effect
on the Company's ability to collect its accounts receivable or on its business,
operating results and financial condition.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------
1997 1996
--------- -------
<S> <C> <C>
Computer equipment and software........... $ 6,621 $ 3,674
Office and other equipment ............... 492 243
------- -------
7,113 3,917
Less accumulated depreciation and
amortization ............................ (3,008) (1,439)
------- -------
$ 4,105 $ 2,478
======= =======
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------
1997 1996
---------------------
<S> <C> <C>
Accrued compensation and related benefits ....... $1,089 $1,140
Accrued commissions to outside sales
representatives ................................ 651 484
Other ........................................... 639 313
------ ------
$2,379 $1,937
====== ======
</TABLE>
-9-
<PAGE> 14
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LINE OF CREDIT
In March 1998, the Company increased its bank line of credit from
$1,000,000 to $4,000,000. Borrowings under this line are due on demand, are
collateralized by substantially all of the Company's assets and bear interest at
the bank's prime rate (8.5% at December 31, 1997) plus 0.5%. As of November 30,
1997, there were no borrowings outstanding under the line. The Company must
maintain compliance with certain current and net worth ratio covenants under
this agreement. As of November 30, 1997, the Company was in compliance with
these covenants.
6. LEASE COMMITMENTS
The Company leases its primary operating facility under a noncancelable
operating lease agreement which expires in November 2001. Rent expense incurred
under operating leases was approximately $465,000 and $186,000 for the years
ended November 30, 1997 and 1996, respectively.
Future minimum lease commitments under operating leases as of November
30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
- --------------
<S> <C>
1998................................................. $ 417
1999................................................. 400
2000................................................. 418
2001................................................. 435
------
Total minimum lease payments............................... $1,670
======
</TABLE>
7. REDEEMABLE STOCK
Redeemable Preferred Stock -- During 1996, the Board of Directors
authorized and designated 130,385 shares of Series A redeemable preferred stock.
In May and June 1996, the Company sold an aggregate of 130,378 shares of Series
A redeemable preferred stock at $100 per share, resulting in net proceeds of
approximately $12,953,000. The significant terms of the Series A redeemable
preferred stock are as follows:
o In the event of liquidation, dissolution or winding up of the Company, the
redeemable preferred stockholders shall receive, per share, the greater of
(1) the initial issue price ($100) plus all accrued but unpaid dividends or
(2) $141.86, prior to any distribution to be made to holders of the
Company's common stock.
o Dividends shall accrue on a daily basis at the rate of 6% per annum on the
sum of the liquidation value plus all accrued but unpaid dividends.
o The redeemable preferred shares have no voting rights except that:
o The Series A preferred stockholders, voting as a class, shall be
entitled to elect two directors as long as the holders of record on June
30, 1996 continue to hold 50% or more of the Series A preferred shares
(or to elect one director if the holders of record on June 30, 1996
continue to hold 25% to 50% of the Series A preferred shares).
-10-
<PAGE> 15
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o So long as any Series A preferred shares remain outstanding, the
corporation shall not, without a vote of 55% of the outstanding Series A
preferred shares, issue securities with equity features senior to Series
A preferred stock, liquidate, change the Series A preferred rights or
merge or consolidate with another entity which results in the Company's
common stockholders immediately prior to the transaction owning less
than 66.7% of the common stock after the transaction.
o The redeemable preferred shares are not convertible into common stock.
On May 1, 1998, the Company completed the public offering of 6,000,000
shares of Common Stock through a Registration Statement declared effective by
the Securities and Exchange Commission on April 27, 1998.
The aggregate liquidation and redemption value of the Series A
Redeemable Preferred Stock was approximately $18.5 million at May 6, 1998. In
connection with the redemption of all outstanding shares of such Series A
Redeemable Preferred Stock from the proceeds of the Company's initial public
offering in May 1998, as required by the terms of such shares, the difference
between the book value and the redemption value of approximately $4.1 million
was recorded as accretion for Preferred Stock when determining income
attributable to common stockholders and earnings per share. This $4.1 million of
accretion was recorded in the second quarter of fiscal 1998 when the offering
was completed.
Redeemable Common Stock -- During May and June 1996, the Company sold an
aggregate of 4,778,804 shares of redeemable common stock to the preferred stock
investors for net proceeds of approximately $7,116,000. Under a stockholder
rights agreement, these investors have a put option, exercisable at any time
after the seventh anniversary of the agreement, to require the Company to
repurchase for cash all of the common shares held by such investors at a price
determined based upon the then market value of the Company divided by the number
of common shares outstanding. This right terminated upon the IPO, whereupon the
redeemable common stock converted to nonredeemable common stock.
8. STOCKHOLDERS' EQUITY (DEFICIENCY)
Retained Earnings (Deficit) -- The Company's retained earnings (deficit)
at November 30, 1997 is comprised of (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
1997
------------
<S> <C>
Cumulative net income from inception........ $ 5,101
Cumulative accretion of redeemable preferred (1,215)
stock.......................................
Repurchase of common stock.................. (20,193)
--------
$(16,307)
========
</TABLE>
Stock Split -- During 1997, the Company effected a two for one split of
the outstanding shares of common stock. All shares and per share data in the
accompanying financial statements have been retroactively adjusted to reflect
the stock split.
-11-
<PAGE> 16
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Repurchase of Common Stock -- During August 1996, the Company
repurchased an aggregate of 4,778,786 shares of common stock held by certain
founders of the Company at $4.227 per share for an aggregate purchase price of
approximately $20,200,000.
Employee Stock Plans -- Under the 1992 Employee Stock Purchase Plan (the
1992 Plan), 4,000,000 shares of the Company's common stock were reserved and
available for issuance to officers, directors, employees and consultants of the
Company. The 1992 Plan provides that the purchase or exercise price of the stock
covered by the Plan shall be no less than the fair value of the Company's common
stock at the date of the grant, as determined by the Board of Directors. The
Board of Directors also has the authority to set exercise dates (generally no
longer than ten years from the date of grant), payment terms and other
provisions for each grant. Stock purchase rights and options granted under the
plan generally vest as to 25% of the shares on the first anniversary of the date
of grant and thereafter vest ratably over three years. The Company has the
option to repurchase exercised shares that have not vested at the original
purchase price upon termination of employment. As of November 30, 1996, there
were no stock purchase rights outstanding under the 1992 Plan and in December
1996, the Company's Board of Directors determined not to grant or issue any
additional shares under the 1992 Plan.
In 1996, the Board of Directors adopted the 1996 Stock Option Plan (the
1996 Plan). Under this plan, 4,500,000 shares have been reserved for issuance to
directors, officers, employees and consultants to the Company at prices not less
than the fair market value for incentive options. These options generally expire
five to ten years from the date of grant. Incentive and nonstatutory options
normally vest and become exercisable at an annual rate of 25%.
In 1997, the Board of Directors adopted the 1997 Director Option Plan
(the Director Plan) and reserved 250,000 shares of common stock for grants of
options to each outside director. The Director Plan provides for the automatic
grant to outside directors of an option to purchase 25,000 shares of common
stock at the time the director joins the board and an option to purchase 5,000
shares of common stock upon the outside director's annual reelection to the
Board.
During 1997, the Company adopted the 1997 Employee Stock Purchase Plan
and, as amended in March 1998, reserved 500,000 shares of common stock (plus
annual increases equal to the lesser of (i) the shares underlying options
granted in the immediately preceding year or (ii) a lesser amount determined by
the Board) for sale to employees thereunder at a price no less than 85% of the
lower of the fair market value at the beginning of the six-month offering period
or the end of such offering.
A summary of activity under the 1996 Plan and the Director Plan is as
follows (in thousands, except per share amounts):
-12-
<PAGE> 17
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE AGGREGATE EXERCISE
FOR GRANT OF SHARES PRICE PRICE PRICE
--------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Options reserved at 1996 Plan inception 4,500
Options granted (554) 554 $2.20-$4.25 $2,159 $ 3.90
Options cancelled 13 (13) $2.20 (29) $2.20
--------- --------- ----------
Balances November 30, 1996 3,959 541 $2.20-$4.25 2,130 $3.94
Options reserved under the Director 250
Plan
Options granted (1,372) 1,372 $5.00-$8.50 10,400 $ 7.58
Options canceled 462 (462) $2.20-$8.00 $(2,684) $ 5.81
Options exercised (2) $5.00 (10) $ 5.00
--------- --------- ----------
Balances November 30, 1997 3,299 1,449 $2.20-$8.50 $9,836 $ 6.79
========== ========= ==========
</TABLE>
At November 30, 1997, approximately 3,074,000 shares were available for
future grant under the 1996 Plan. At November 30, 1997, 225,000 shares were
available for future grant under the 1997 Director Option Plan. As of November
30, 1997, approximately 858,000 shares exercised and outstanding under the 1992
Plan were subject to repurchase by the Company at the original purchase price.
The weighted average fair value of rights or options granted in fiscal
1996 and 1997 was $0.56 and $2.11, respectively. At November 30, 1996, no
options were exercisable.
In connection with certain issuances of stock rights or options under
the Plans, the Company recorded stock compensation for the difference between
the deemed fair value for accounting purposes and the issuance or exercise
price. Such amounts are amortized to expense over the related vesting periods.
Additional information regarding options outstanding as of November 30,
1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
------------------------------------------------- ------------------------------
WEIGHTED AVE.
RANGE OF REMAINING
EXERCISE NUMBER CONTRACTUAL WEIGHTED AVE. NUMBER WEIGHTED AVE.
PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.20-$4.25 328,250 6.1 $ 3.92 125,749 $ 4.08
$5.00-$6.80 325,700 8.2 6.68 4,750 6.80
$8.00-$8.50 795,240 9.1 8.02 13,840 9.00
--------- ----- ----- --------- -----
1,449,190 8.2 $ 6.79 144,339 $ 4.55
========= ===== ===== ========= =====
</TABLE>
Additional Stock Plan Information -- Effective for fiscal 1997, the
Company was required to adopt the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 defines a fair value method of accounting for
stock-based compensation awards to employees. The Company has elected to
continue to follow the provisions of Accounting Principals Board No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations.
-13-
<PAGE> 18
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 123 requires that the fair value of stock-based awards to employees
be calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
which greatly affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, five years; no stock volatility; risk free interest
rate, approximately 6.0% in 1996 and 6.1% in 1997; and no dividend payments
during the expected term. Forfeitures are recognized as they occur. If the
computed fair values of the 1996 and 1997 awards had been amortized to expense
over the vesting period of the awards, pro forma income attributable to common
stockholders and diluted earnings per share would have been approximately
$2,036,000 ($0.09 per share) in 1996 and a loss of ($819,000) (or ($0.04) per
share) in 1997. However, the impact of outstanding non-vested options granted
prior to 1996 has been excluded from the pro forma calculation; accordingly, the
1996 and 1997 pro forma adjustments are not indicative of future period pro
forma adjustments, when the calculation will apply to all applicable stock
options.
9. INCOME TAXES
The provision for income taxes for the years ended November 30 consists
of (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
Current:
<S> <C> <C>
Federal........................................... $ 1,884 $ 1,484
State............................................. 401 469
Foreign........................................... 580 177
------- -------
Total current......................................... 2,865 2,130
------- -------
Deferred:
Federal........................................... (1,894) (370)
State............................................. (332) (52)
------- -------
Total deferred........................................ (2,226) (422)
------- -------
Total provision for income taxes...................... $ 639 $ 1,708
======= =======
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate to income before taxes as a
result of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Income tax expense.................................... $ 543 $ 1,416
State income taxes, net of federal benefit............ 81 250
Other................................................. 15 42
------- -------
Total provision for income taxes...................... $ 639 $ 1,708
======= =======
</TABLE>
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<PAGE> 19
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities as of November 30 are
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Deferred tax assets:
Customer advances included in taxable income.......... $1,930 $ 106
Reserves and accruals not current deductible.......... 664 213
State taxes........................................... 136 169
Depreciation and amortization......................... -- 16
---- -----
Net deferred tax assets................................... $2,730 $ 504
====== =====
</TABLE>
10. EARNINGS PER SHARE
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts). For the purposes
of the EPS compilation, net income has been reduced by the amount of the
periodic accretion for redeemable preferred stock (see Note 7).
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
1997 1996
--------- ----------
<S> <C> <C>
Numerator -- Basic and diluted EPS
Net income.......................................... $ 136 $ 2,066
======= =======
Denominator -- Basic EPS
Common stock outstanding............................. 21,365 21,064
====== =======
Basic earnings per share................................ $ 0.01 $ 0.10
======= =======
Denominator -- Diluted EPS
Denominator-- Basic EPS.............................. 21,365 21,064
Effect of dilutive securities:
Common shares subject to repurchase rights....... 978 854
Stock purchase rights and options................ 242 479
------ -------
$22,585 $22,397
Diluted earnings per share.............................. $ 0.01 $ 0.09
======= =======
</TABLE>
11. MAJOR CUSTOMERS AND INTERNATIONAL SALES
In fiscal 1997 and 1996, one customer accounted for more than 10% of
revenue.
Export sales to Asia, Europe and North America accounted for
approximately 69% and 53% of total revenue for the years ended November 30, 1996
and 1997, respectively. Export sales to Asia accounted for approximately 61% and
48% of total revenue in fiscal 1996 and 1997, respectively.
12. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan.
Employees meeting the eligibility requirements, as defined, may contribute
specified percentages of their salaries. The Company has not contributed to the
plan to date.
-15-
<PAGE> 20
ASPEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RESTATEMENT OF FINANCIAL STATEMENTS
The Company, after consultation with its new independent accountants,
PricewaterhouseCoopers LLP, determined to restate its financial results for the
fiscal years ended November 30, 1997 and 1996. The restatement relates
principally to the timing of revenue recognized on certain of the Company's
contracts. Specifically, the revenue adjustments relate to three principal
areas: (i) changes due to revisions in the estimated progress on contracts that
were accounted for on a percentage of completion basis, (ii) the deferral of
previously recognized revenue on a distribution contract and (iii) the
accounting for exchange rights on a specific contract.
As a result of the restatement, the financial statements have been
restated as summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
------------------------ ---------------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenue $22,392 $20,278 $15,265 $14,999
Net income 2,227 959 2,617 2,458
Income attributable to common stockholders 1,404 136 2,225 2,066
Diluted earnings per share $ 0.06 $ 0.01 $ 0.10 $ 0.09
</TABLE>
14. LEGAL PROCEEDINGS
A number of securities class actions have been filed against the
Company and certain of its officers and directors. One federal complaint was
filed in the United States District Court for the Northern District of
California; other complaints were filed in the Superior Court of Santa Clara
County. The lawsuits concern the Company's financial results for the second
quarter of fiscal 1998 and were filed on behalf of persons who purchased the
Company's stock between April 28, 1998 and June 30, 1998. The complaints allege
violations of state and/or federal securities laws arising out of alleged
misstatements and omissions to state material facts about the Company's initial
public offering of Common Stock. The Company believes that the actions are
without merit and intends to defend against them vigorously. Nevertheless,
litigation is subject to inherent uncertainties, and thus there can be no
assurance that these suits will be resolved favorably to the Company or will not
have a material adverse effect on the Company's financial condition and results
of operations.
14. SUBSEQUENT EVENTS
In April 1998, the Company completed its purchase of SIS
Microelectronics, Inc., an engineering design services company located in
Longmont, Colorado in exchange for the issuance of an aggregate 400,000 shares
of Common Stock. As part of this transaction the Company expensed approximately
$700,000 of in-process research and development in the second quarter of fiscal
1998.
-16-
