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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
ASPEC TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0298386
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
830 E. ARQUES AVENUE, SUNNYVALE, CA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 774-2199
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK PAR VALUE $0.001 PER SHARE NASDAQ NATIONAL MARKET
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
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 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of such stock on November 30, 1999,
as reported by the Nasdaq National Market, was approximately $67 million. Shares
of Common Stock held by each 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.
The number of outstanding shares of the registrant's Common Stock on
November 30, 1999 was 34,300,190.
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INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders to be held on April 27, 2000 are incorporated by reference in Part
III of this Form 10-K.
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Consolidated Financial Data........................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 56
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 56
Item 11. Executive Compensation...................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 56
Item 13. Certain Relationships and Related Transactions.............. 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 57
SIGNATURES............................................................ 59
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When used in this Report, the words "expects," "anticipates," "believes,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements, which include:
- statements concerning the timing of new product introductions;
- the functionality and availability of products under development; demand
for or pricing of the Company's products;
- the percentage of export sales and
- sales to key customers; are subject to risks and uncertainties, including
those set forth in Item 1 of Part I and in Item 7 of Part II hereof
entitled "Certain Factors Which May Affect the Company's Business or
Future Operating Results" and elsewhere in this Report, that could cause
actual results to differ materially from those projected in the
forward-looking statements. These forward-looking statements speak only
as of the date of this Report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any change in
the Company's expectations with regard thereto or to reflect any change
in events, conditions or circumstances on which any such forward-looking
statement is based, in whole or in part.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
During 2000, we will undergo a fundamental and rapid shift in our business
with the major focus on Internet-enabled, business-to-business content
management software applications that automate Inter-Enterprise Collaboration
("IEC"). This will move us away from our historical business of semiconductor
intellectual property ("SIP") library development and design tools and services
business ("SIP Business"). The primary impetus for this business shift is a
declining revenue stream as competitive pressure makes SIP libraries nearly free
commodities. We will continue in our efforts to provide innovative Electronic
Design Automation (EDA) software solutions which address the toughest problems
in deep submicron design and verification for integrated circuits ("IC").
These shifts in business emphasis are being achieved by tailoring Aspec's
talent pool to the rapidly emerging trends and realities of an Internet
dominated economy that is gaining favor among high technology customers. We
believe that these same trends will migrate to other complex manufacturing
domains and will facilitate rapid growth in the total available market for many
years. According to Gartner Group, the worldwide business-to-business e-commerce
market reached $145 billion in 1999 and is expected to surpass $7.29 trillion by
2004.
We have historically been a leading provider of merchant SIP libraries and
design tools and services used for developing high-performance, complex IC,
including system-on-a-chip ICs ("SOC"). Our SIP consists of: cell libraries,
tools, design methodologies and related engineering services which, when used in
conjunction with EDA tools, simplify the process of designing complex ICs. Our
products include SIP libraries which consist of logic functions based on gate
array/embedded array or standard cell, I/Os and memories. We offer SIP design
tools to ensure that various commercially available EDA tools work together to
accurately depict the IC design in silicon and to enable the portability of
designs. Our SIP design tools include memory compilers which allow customers to
generate memory libraries as well as AdverPro software which is designed to
manage the design process, provide an accurate timing function across EDA tools
and help ensure compliance with proper design procedures.
We also offer various design consulting services on a per project basis. In
September 1999, our design consulting services group was spun out as Ascent
Design Corporation ("Ascent"), a wholly owned subsidiary.
In addition, system level design consulting services are provided through
SIS Microelectronics Corporation ("SIS"), a wholly owned subsidiary located in
Longmont, Colorado, which was acquired in April 1998. SIS delivers integrated
system-level silicon solutions combining SIS's extensive experience in chip
design and implementation with proprietary and partner IP. SIS also provides
higher-level intellectual property ("IP") cores and IC's used in the printer and
imaging industry. SIS offers a varied mix of IC technology, IP and design
expertise needed for timely, cost effective system solutions. SIS is targeting
the embedded processor market for IP development, which includes laser printers,
communications, and mass storage devices. The first proprietary products shipped
in 1994 are being used in high-end laser printers. SIS has forged alliances with
the leading EDA, IP and silicon suppliers to provide access to our
client/partners with a wide portfolio of the essential IP building blocks
required to implement cost effective silicon solutions. SIS has expanded our
capabilities to include firmware and software to support the growing list of
embedded processors used by our clients and partners. In fiscal 1999 SIS
accounted for 34% of our revenue.
Our historical SIP Business experienced declining revenues and lost money
in fiscal 1999. This was caused in part by the competitive pressure of "free
libraries" being offered by competitors in the library business under a royalty
based business model in late 1998. Under this business model, standard libraries
are provided free of a licensing fee with royalties being paid to the library
supplier by the foundries when the customer's IC, which was designed using the
library, reaches volume production. However, only a relatively small number of
IC design starts reach volume production and the time delay for payment could be
a year or more. In addition, some royalties are paid pro-rata based on IC area
and the maximum royalties to be paid to
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all library suppliers are capped. SIP libraries essentially have become a free
commodity. The design services business also experienced declining revenues due
to off-shore competition based in foreign countries which have a much lower
labor rate and cost structure.
It became apparent in fiscal 1999 that we could not sustain or grow the
business based on SIP libraries and design tools and services. We needed to
diversify our business and establish a new business direction in order to regain
profitability and growth. The best way to leverage our knowledge and experience
in silicon process, design methodology and Electronic Design Automation tool
expertise was for us to develop Silicon Intelligent-TM -- EDA design tools that
address current gaps and inadequacies in design technology and that increase
design productivity.
Improved electronic design tools are only part of the solution to achieving
significantly increased productivity gains in the design process. Potentially
greater gains in productivity and time-to-market can be achieved through the
automation and management of various product processes, from initial product
development to end of life. There currently is a large and growing demand for
Internet-enabled, easily deployable, scalable, and manageable,
business-to-business Inter Enterprise Collaboration (IEC) content management
software solutions for the emerging e-commerce content supply chain.
Our new mission, as a result of these dynamics and marketplace paradigms,
is to establish a significant market position as a supplier of innovative
software applications which dramatically increase productivity and achieve a
high rate of return on investment by leveraging human expertise already present
in the organization. To achieve this mission, we have adopted the following
strategy:
1) Sell our SIP Business and transform Aspec into a software company. To
implement this strategy, we have announced that we have signed a
definitive agreement, subject to the approval of our Board of Directors,
to sell our SIP Business which includes our traditional SIP library
business unit, Ascent and SIS.
2) Provide Internet-enabled, business-to-business, inter-enterprise
collaboration applications which shorten time-to-market, improve
adaptability and increase operational excellence by developing,
capturing, transferring, sharing and leveraging corporate expertise
required to deliver and maintain IEC content management throughout the
entire content supply chain. To implement this strategy in December
1999, we acquired Inbox Software ("Inbox") whose products provide fully
automated solutions for the mission-critical, business-to-business,
e-commerce product content and management processes.
3) Provide innovative Silicon Intelligent Electronic Design Automation
(EDA) software solutions which address the toughest problems in deep
submicron (less than 0.5-micron feature size) design and verification
for complex Integrated Circuits (IC) and SOC systems. To implement this
strategy, we have acquired Chip & Chip Inc., Verilux Design Corporation
and Novo Systems Corporation which are providers of Silicon Intelligent
EDA tools.
4) Maintain focus on technological innovation, market growth and create
strategic relationships in order to grow the IEC content management
business.
IEC CONTENT MANAGEMENT PRODUCTS AND SERVICES
Inter-Enterprise Collaboration (IEC) is a powerful new business concept
enabled by the coalescence of mature relational content based management
technologies with the swift empowerment of instant communications on the
Internet. The global Internet revolution is forcing companies to move from data
sharing to externalized process integration. There is a renewed focus on
processes, particularly in the realm of personalization of content between
companies and customers, partners, and suppliers. This is especially true in the
manufacturing arena where automation has focused on product design, not content
management and distribution. The manufacturing industry is dependent on process
for regional and global manufacturing quality control. For these businesses,
content management must be an enabler, not a barrier to rapid adaptability and
operational excellence.
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With an IEC-enabled manufacturing process, for example, the chief designer
for a product manufacturer can generate a master plan of a new design and, in
short order, begin simultaneous manufacturing of the new design in factories
around the world. The steps of acquiring various raw materials and components,
distributing them to the factories, bringing them to inventory, programming the
automated assembly equipment, and adjusting individual production schedules are
all handled by the IEC applications. The entire content supply chain is
involved, including the traditional product design and supply chain management
to customer service. Because IEC applications virtually eliminate the human
errors associated with current methods, while leveraging human expertise on how
to get things done, our main attractions as a manufacturing technology are rapid
time to revenue, extraordinary product quality and sharply reduced cost of
customer service.
The IEC model can be applied to various industries to improve time to
revenue, increase product quality, and reduce the cost of customer service.
Inbox's products provide automated Internet-enabled, business-to-business,
IEC content management applications which shorten time-to-market by developing,
capturing, transferring, sharing and leveraging the corporate expertise required
to deliver and maintain content throughout the content supply chain. The
customers for these products include anyone looking for competitive advantage by
leveraging the expertise inherent in their people and processes (e.g.:
vertically integrated self-sufficient manufacturers as well as horizontally
integrated teams of vendors.) Inbox's IEC content management software provides
integrated workflow and immediate, ease-of-use functionality. The software
improves the ability of Internet-connected manufacturing supply chains to
communicate and collaborate on new product designs and product changes. For
example, an Engineering Change Order ("ECO") for a product modification can be
automatically routed on a real time basis through an integrated work flow
approval process and instantly communicated over the Internet to the "virtual
Inbox" of the manufacturing organization, which may be a separate company
located anywhere in the world along with other companies in the supply chain.
Inbox products are the first enterprise-class solutions for automating the
product change process for both large and mid-tier companies. Our products set a
new standard for functionality, flexibility and ease-of-use enabling customers
to transform the product change process into a highly optimized, value-added
business system.
Inbox products also manage business processes, controlling the way people
create and modify content and addressing the impact of tasks on content.
Specifically, Inbox software products:
1. Manage what happens to the data when someone works on it.
A product may go through hundreds of design changes during the course of
development, each involving far-reaching modifications to the underlying
engineering content. Inbox software acts as the engineer's working
environment, capturing all new and changed content as it is generated,
maintaining a record of which version it is, recalling it on demand and
effectively keeping track of the engineer's every move. The software allows
reference to any documents, file and form and facilitates access by other
members of the design team and supports the concurrent engineering
principle. For example, although only one user can be working on a master
design, colleagues working on the same project can be instantly notified
that an updated 'master' design is available, and reference copies of it
will be inserted automatically in each collaborator's "Inbox". A given
document or bill of materials ("BOM") can be worked on only by the user to
whom it is logged out, but the content can be looked at and copied by
everyone with the necessary access permission.
2. Manage the flow of data between people.
Inbox products make it easy for design team members to share meaningful
groups of documents, as well as move work around from department to
department, or from individual to individual in logically organized
bundles. During the development of a product, many thousands of parts may
need to be designed. For each part, files need to be created, modified,
viewed, checked and approved by many different people, perhaps several
times over. Each part may call for different development techniques and
different types of content. Since work on any of these master files will
have a potential impact on other related files, there needs to be
continuous cross-checking, modification, resubmission and rechecking.
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Bringing order to this highly complex workflow is what Inbox products do
best. In particular, the software keeps track of the thousands of
individual decisions that determine who does what next. The software allows
the up-to-date status of the entire task, with all supporting content, to
be tracked and viewed by authorized individuals at all times. Communication
within the development team is enhanced. When content and files are passed
around, they can be accompanied by instructions, notes and comments,
eliminating human error and misinterpretations. Inbox products have
'redlining' capability and the ability for annotating files with the
electronic equivalent of 'post-it' notes.
3. Track all the events and movements that happen during the history of a
project.
In addition to keeping comprehensive database records of the current state
of the project, Inbox products also record the states and milestones the
project has been through. The software provides a valuable source of
process audit trail content which is a fundamental requirement for
conformance to international quality management standards such as ISO9000,
EN29000 and BS5750. This level of historical tracking, as well as providing
comprehensive auditing, also permits the active monitoring of individual
performance -- invaluable during time-critical projects.
Inbox's products dramatically increase design productivity by maximizing
the time-to-market benefits of concurrent engineering while maintaining
control of product content and distributing it automatically to the people
who need it -- when they need it. Master data is held only in a secure
'vault' where its integrity can be assured and all changes to it are
monitored, controlled and recorded. Duplicate reference copies of the
master data can be distributed freely to users in various departments or
companies for design, analysis and approval. The new data is then released
back into the vault. When a 'change' is made to content, a modified copy of
the content is signed, dated, and stored in the vault alongside the old
content which remains in its original form as a permanent record.
Inbox's products address the critical need to integrate IEC content supply
chain management using the Internet with suppliers and overall management of
information. These products include:
- ecFlow -- Solution for Engineering Change Management
- dcFlow -- Solution of Documentation Change Management
- npFlow -- New Product Introduction Program Management
Inbox products have application beyond our current high technology
customers and address a much larger market of midsize to Fortune 500
manufacturing companies. Wherever manufactured products change rapidly, have
extended supply chains with or without outsourcing and experience abbreviated
life cycles due to continuous improvements, Inbox's Flow series can provide a
strategic solution.
The advantage of the Inbox software is our combination of flexible
applications and a revolutionary components-based workflow technology, which
allows companies to bring Inbox's software online faster, for a much lower price
than competitors. Our goal is to rapidly increase this market penetration on a
global basis through verticalization. Certain industries, such as the automotive
for example, have common traits that can be addressed as a group to increase the
attractiveness of Inbox products within the industry. Verticalized versions of
Inbox are being prepared for launch during 2000 and beyond.
Consulting Services
We provide a variety of services that help integrate the Inbox products
into the customer's design environments and customize the products to fit the
customer's business processes. We believe that the need for such services will
increase rapidly as IEC products earn market share.
Maintenance Services
We offer standard support services, which include product updates,
telephone and internet support and metrics reporting. Custom support services
are also available, including standard support services plus technical
management, application and educational services.
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EDA PRODUCTS AND SERVICES
We are currently developing Electronic Design Automation (EDA) software
products and will provide related services which enable engineers to design,
analyze, interconnect and verify integrated circuits. Our EDA products are
focussed on the fabrication of "deep submicron" integrated circuits that are
quickly becoming most prevalent.
The term "deep submicron" refers to an IC manufacturing process that has
transistor gate lengths under 0.35m (micron), and generally denotes the most
difficult and challenging region for designers. Advances in the deep submicron
area require increasingly sophisticated EDA tools that enable the precise
determination of the physical characteristics of a design prior to commitment to
manufacturing. We have concentrated EDA tool development into those areas of
design automation which offer engineers the greatest leverage toward successful
volume manufacturing capabilities.
Our EDA business unit ("EDA Business") was formed with the acquisition and
merger of Chip & Chip, Inc. in September 1999, Verilux Design Corporation in
September 1999 and Novo Systems Corporation in October 1999. These three EDA
companies were acquired to address the most challenging problems in EDA. Each
generation of semiconductor process advance brings new challenges in how
integrated circuit designers model, integrate, simulate, and verify the entire
chip and Systems-on-a-Chip ("SOC")). These challenges provide significant new
opportunities that will launch next generation EDA tools. In the sub-0.18-micron
generations, the challenge has become how to efficiently integrate complex, yet
subtle, device and interconnect physics into EDA software that can effectively
handle millions of transistors. We believe that our deep understanding of these
device physics issues combined with our extensive experience in semiconductor
process technology will provide advanced EDA tools to solve key design problems.
The technologies these companies have brought to Aspec include:
- Deep sub micron analysis of interconnect properties;
- Cross talk analysis of deep Submicron designs which includes Resistance
(R), Capacitance (C) and Inductance (I);
- Electrostatic Discharge and Latch-up analysis of I/O cells; and
- High level Verification and Test Bench development.
Deep Sub Micron Physical Analysis and Verification
These set of tools will assist in the analysis of deep submicron ("DSM")
interconnect models and assist in the optimization of process yield and overall
performance.
Due to the extremely small geometries of DSM, gate delay is no longer the
predominate component of circuit delay which impacts the overall performance of
the device. Interconnect between devices now have the greatest impact on overall
device delay and therefore performance. Aspec's initial suite of DSM physical
analysis tools will assist in the development of very accurate interconnect
models for DSM designs. These tools are currently in development. Designers can
then use this model for estimation of interconnect delay for floor planning or
circuit analysis. Our EDA software products which will provide these
capabilities include:
- X-Savior (Fast 3D Full-Chip Crosstalk Analyzer)
- SWIM (Statistically based Worstcase Interconnect Model generator)
- InterCal (Interconnect Delay Calculator for early design stage) will be
the first available technology to address statistically-based worst case
interconnect modeling for deep submicron designs.
X-Savior will serve an increasingly important niche market space known as
crosstalk analysis. As transistor counts climb and engineers continue to
increase the mix of digital and analog circuits on ever-larger
systems-on-a-chip, noise generated by one microregion can cause improper
operation of logic circuitry in an adjacent microregion. Engineers have long
understood the need for crosstalk analysis to eliminate negative effects, but
have been constrained to deal with it due to excessively long run times for
analysis tools. If
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crosstalk is not eliminated prior to manufacturing, back-end test may reveal
serious system-level issues which prevent entire wafer lots from reaching the
market.
X-Savior will provide fast, full-chip crosstalk screening and analysis. The
software delivers run times that are typically 15 times faster than other tools.
Importantly, the software performs three-dimensional analysis. X-Savior is
compatible with the most popular content based file formats employed worldwide
and runs on similarly popular workstations. The output is a crosstalk violation
report plus a netlist in SPICE or DSPF format. The report and netlist facilitate
rapid correction of microregion design issues. X-Savior is in development and is
currently scheduled for release in the Fourth Quarter, 2000.
The Statistically-based Worst case Interconnect Model (SWIM) generator and
Interconnect delay Calculator (InterCal) products will give semiconductor
manufacturers the ability to enhance performance, maximize capacity, optimize
power consumption and improve overall yield by allowing designers to create and
use more accurate worst case interconnect models. On-chip interconnect delay is
considered the key determinant of the overall performance of an integrated
circuit. Although it may not seem important, the time it takes for electrons to
travel between transistors has become a major factor in DSM design. Because
transistor counts have climbed into the millions, the accumulation of signal
delays now account for the majority of total system delays. Clearly, engineers
must have tools that deliver high quality delay statistics related to the
process as well as to the geometry of design. SWIM will provide fast, accurate
and flexible analysis that is easy to use. The output enables the engineer to
directly address those regions of chip design that cause higher-than-expected
delay by offering factual guidance on process variations such as dielectric
thickness and metallization width, and physical variations such as resistance
and capacitance.
InterCal is similar but is intended for use very early in the design stage
of an integrated circuit. It allows engineers to estimate load conditions that
enable calculation of driver values for a specific interconnect load. This in
turn determines transistor sizes and related power consumption issues. InterCal
effectively eliminates the need to redesign chips which fail to correctly
deliver sufficient drive current for important interconnect nets. SWIM and
InterCal provide extremely accurate 2-D and 3-D statistically-based worst case
interconnect modeling and pre-layout interconnect content for deep submicron
design and process development. Most manufacturers use worst case process
variations (skew corner worst case model), which provide pessimistic models, and
therefore cause wide, unrealistic design margins for chip designers. By using
statistically-based worst case interconnect modeling, an accurate estimation can
be made of the process variation and therefore designers can take greater
advantage of deep submicron technology without the risk of failing chips. By
using SWIM and InterCal, engineers will now be able to accurately model
interconnect using worst case modeling techniques without sacrificing
performance, capacity or yield.
With the number of designs targeted for 0.18um technology and below
increasing over the next four years, the demand for SWIM and InterCal type
technology is also forecasted to grow. With the high cost of wafer fab
development and optimization, semiconductor manufacturers can now leverage more
out of each technology generation through more accurate modeling techniques such
as SWIM. Both SWIM and InterCal are in development and currently scheduled for
release in the Second Quarter of 2000.
System Level Verification and Test Bench Environments
Test Bench development, re-use and management continues to be a critical
factor for large system level IC designs. In the Third Quarter of 2000, we will
be introducing a suite of tools that will provide a verification environment to
address the verification and test bench issues.
Novo Systems currently provide worldwide maintenance and support for Zycad
accelerators and these customers will continue to be supported in the future.
Updates and upgrades to current customers using existing Zycad accelerators and
software will continue to be available via local support and the Internet.
CUSTOMERS
Our historical principal customers for our SIP Business include ASIC and
foundry companies, EDA companies, electronic system companies and IC companies.
We have been dependent on a relatively small
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number of customers for a substantial portion of our annual revenue. In fiscal
1997, Tritech accounted for 10% of our revenue, and our seven largest customers
accounted for 43% of our revenue. In fiscal 1998, Asahi Glass accounted for 13%
of our revenue and five of our largest customers accounted for 43% of our
revenue. In fiscal 1999, one customer accounted for 17% of our revenue, and our
five largest customers accounted for 44% of our revenue. We anticipate that the
majority of our revenue will be derived from a relatively small number of
customers through at least fiscal 2000.
Our principal customers for our Inbox Software products include our
traditional high technology customer base for our SIP Business in addition to
manufacturing companies, and also any company with a process for IEC content
management. Since Inbox was acquired in December 1999, Inbox did not contribute
to our revenue in fiscal 1999.
Our principal customers for our EDA products will be the same high
technology customer base as our SIP Business. Our EDA products are still under
development and did not contribute to our revenue in fiscal 1999.
None of our customers have a written agreement with us that obligates it to
license additional products or to renew our maintenance agreement, and there can
be no assurance that any customer will purchase additional software licenses or
renew our maintenance agreement. The loss of one or more of our major customers,
or reduced orders by one or more of such customers, could materially adversely
affect our business, operating results and financial condition. The results of
our SIP Business which we intend to sell, are not indicative of our future
results. See "Other Factors Affecting Future Operating Results -- Customer
Concentration; Dependence on Customers in Asia."
SALES, MARKETING AND CUSTOMER SUPPORT
Our current customers for our historical SIP Business are principally
located in North America, Japan, Korea, and Taiwan. We market our products
primarily through our direct sales force. A significant portion of our EDA
customers are located in Asia. Our current customers for our Inbox products are
principally located in North America and we expect potential sales growth in
Europe and Asia. We employ highly skilled engineers and technical sales persons
capable of serving the sophisticated needs of our customers. In addition to our
direct sales and marketing efforts, we participate in industry trade shows and
seminars to promote the adoption of our products. In parts of Asia, we market
our products primarily through a limited number of independent distributors that
license and service our products in these markets. We also support these
distributors with technical, sales and management personnel.
A significant portion of our revenue is derived from customers outside the
United States, and we anticipate that international revenue will continue to
account for a significant portion of our total revenue. Revenue from customers
outside the United States, substantially all of whom are located in Asia,
accounted for 53%, 54% and 32% of revenue in fiscal 1997, 1998 and 1999,
respectively. Although we do not believe that we experienced any material
adverse impact in revenue as a result of the financial dislocations that
occurred in certain Asian countries during 1998 and 1999, we have experienced a
lengthening of the payment period for accounts receivables from certain
Asian-based customers. At November 30, 1999, approximately 71% of our accounts
receivable (including unbilled receivables) were from Asian-based customers.
Although we currently believe, based in part on continuing discussions with
these customers, that our existing accounting reserves are adequate given the
estimated exposure related to all of our 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 our ability to collect our accounts
receivable or on our business, operating results and financial condition. The
results of our historical SIP Business which we intend to sell, are not
indicative of our future results.
Our international business involves a number of risks, including the impact
of possible recessionary environments in foreign economies, political and
economic instability, cancellation of maintenance contracts, exchange rate
fluctuations, longer receivables collection periods and greater difficulty in
accounts receivable collection from distributors and customers, difficulty in
managing distributors or sales representatives, unexpected changes in regulatory
requirements, reduced or limited protection for intellectual property rights,
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export license requirements, tariffs and other trade barriers and potentially
adverse tax consequences. Although we price our products and services in United
States dollars, currency exchange fluctuations could have a material adverse
effect on our business to the extent that our pricing is not competitive with
products priced in local currencies. We do not currently hedge against foreign
currency fluctuations. See "Other Factors Affecting Future Operating
Results -- Risks Associated With International Operations." We license all of
our products to customers under nonexclusive agreements that do not transfer
title and that restrict use of the products to specified purposes. We offer
customers the option of licensing our products enterprise-wide or for use at a
particular site or on designated computers at specific sites. License fees are
dependent on the type of license, product mix and number of copies of each
product subject to the license.
We provide customers with technical support as well as training and
consulting services. We believe that a high level of customer service and
support is important to the adoption and successful utilization of our products.
Our customers typically pay an additional fee for maintenance agreements that
entitle them to technical support and periodic product upgrades. We also offer
additional training and consulting services on a fee basis. To address technical
issues, we have established a technical support group comprised of field and
headquarters applications engineers who understand the design methodologies of
our customers. Through our technical support group, we provide customers with
software updates, documentation updates and assistance with problem
identification and resolution.
RESEARCH AND DEVELOPMENT
We believe that our future competitive position will depend in large part
on our ability to quickly and cost effectively develop new products, maintain
and enhance our current product line, maintain technological competitiveness and
meet an expanding range of customer requirements. During fiscal 1997, 1998 and
1999, research and development expenses were $1.2 million, $2.6 million and $5.6
million, respectively. In addition to research and development expenses,
engineering efforts devoted to developing products for which revenue is
recognized on a percentage of completion basis are recognized as cost of
revenue. As a result of our engineering efforts and acquisitions, we have a
substantial base of technology, which we are able to reuse in other product
offerings. We expect to continue to devote significant resources to our various
engineering efforts. To date, all product development costs have been expensed
as incurred. Our research and development efforts are focused on continued
development of our Inbox and EDA products.
Our products are subject to rapid technological change, frequent
introductions of new products, short product life cycles, changes in customer
demands and requirements and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. Accordingly, our future
success will depend on our ability to continue to enhance our existing products
and to develop and introduce new products that satisfy increasingly
sophisticated customer requirements and that keep pace with product
introductions by our competitors. Any failure by us to anticipate or respond
adequately to changes in technology or customer requirements, or any significant
delays in product development or introduction, would have a material adverse
effect on our business, operating results and financial condition. There can be
no assurance that we will be successful in our product development efforts, that
we will not experience difficulties that could delay or prevent the successful
development, introduction and sale of new or enhanced products or that such new
or enhanced products will achieve market acceptance. We have in the past
experienced delays in the release dates of certain of our products. If release
dates of any new significant products or product enhancements are delayed, our
business, operating results and financial condition would be materially
adversely affected. We could also be exposed to litigation or claims from our
customers in the event we do not satisfy our delivery commitments. There can be
no assurance that any such claim will not have a material adverse effect on our
business, operating results and financial condition. See "Other Factors
Affecting Future Operating Results -- Dependence Upon Continuous Product
Development; Risk of Product Delays."
COMPETITION
Our historical competitors in our SIP Business include Artisan Components,
Inc., Compass Design Automation (a division of Avant!), Mentor Graphics, Cadence
Design Systems, Nurologic, and Silicon
10
<PAGE> 11
Architects (a division of Synopsys Inc.) Our principal competitors for our EDA
products include Cadence Design Corporation, Avant!, Mentor Graphics
Corporation, and Synopsys Inc.; and Agile Software, Opentext, Documentum and
Matrix One for the Inbox products. We also experience significant indirect
competition from the engineering departments of potential customers that
maintain and develop internally, EDA design tools and IEC content management
software systems. It is also likely that increased competition could come from
large companies such as Microsoft Corporation. Increased competition could
eventually result in price reductions or reduced operating margins which could
materially adversely affect our business, operating results and financial
condition. Many of our potential competitors have significantly greater
financial, technical, marketing and other resources than us. As a result, they
may be able to respond more quickly to new or emerging technologies and to
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. There can be no
assurance that we will be able to compete successfully against current or future
competitors or that competitive pressures will not materially adversely affect
our business, operating results and financial condition. We believe the
principal elements of competition in our markets are the range of EDA tools and
IEC content management technologies supported, technological leadership, product
functionality, the level of technical support provided, software reliability and
price. We believe that we compete favorably with respect to each of these
factors. See "Other Factors Affecting Future Operating Results -- Competition."
PROPRIETARY RIGHTS
Our success is dependent on our ability to protect our proprietary
technology. We rely upon a combination of copyright, patent, trade secret and
trademark laws to protect our proprietary technology. We enter into
confidentiality agreements with our employees, distributors and customers and
limit access to and distribution of the source code to our software and other
proprietary information. There can be no assurance that the steps taken by us in
this regard will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. Any such
misappropriation of our technology or development of competitive technologies
could have a material adverse effect on our business, operating results and
financial condition. Despite our efforts to protect our proprietary rights,
there can be no assurance that we will be able to protect our proprietary rights
against unauthorized third-party copying or use, and attempts may be made to
copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Policing the unauthorized use of our
products is difficult and we could incur substantial costs in protecting and
enforcing our intellectual property rights. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition.
As of November 30, 1999, we held six U.S. patents for our SIP Business
which expire from 2013 to 2015 and had two U.S. patent applications pending. We
currently do not have any patents issued for our Inbox or EDA products. We also
have twelve patent applications pending for our SIP Business in various foreign
jurisdictions. These patents and pending applications for our SIP Business will
be transferred with the business assets upon the closing of the sale of the SIP
Business. We have several patent applications under consideration for our Inbox
and EDA products. We expect to continue to file patent applications where
appropriate to protect our proprietary technologies; however, we believe that
our continued success depends primarily on factors such as the technological
skills and innovation of our personnel rather than on our patents. We have
registered the trademarks Aspec Technology, ABOND, HDEA, I/O GEN, and Mastergen
and have one trademark application pending in the United States. The process of
seeking patent and trademark protection can be expensive and time consuming.
There can be no assurance that patents or trademarks will be issued from pending
or future applications or that, if issued, such patents or trademarks will not
be challenged, invalidated or circumvented, or that rights granted thereunder
will provide meaningful protection or other commercial advantage to us.
Moreover, there can be no assurance that any patent or trademark rights will be
upheld in the future or that we will be able to preserve any of our other
intellectual property rights. In addition, the laws of certain countries in
which our products are licensed or distributed do not protect our products and
11
<PAGE> 12
intellectual property rights to the same extent as the laws of the United
States. Accordingly, effective trademark, copyright and patent protection may be
unavailable in certain foreign countries.
As is common in the technology industry, we may from time to time receive
notices from third parties claiming infringement by our products of third-party
proprietary rights. While we are not currently subject to any such claim, we
believe that our products could increasingly be subject to such claims as the
market for our products grows and as more competitors enter the market. Any such
claim, with or without merit, could result in significant litigation costs and
require us to enter into royalty and licensing agreements, which could have a
material adverse effect on our business, operating results and financial
condition. Such royalty and licensing agreements, if required, may not be
available on terms acceptable by us or at all. See "Other Factors Affecting
Future Operating Results -- Limited Protection of Proprietary Rights."
EMPLOYEES
As of November 30, 1999, we had 91 employees, including 51 in operations,
12 in research and development, 11 in sales and marketing and 17 in finance and
administration. None of our employees are represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our relations
with our employees to be good.
EXECUTIVE OFFICERS
Our executive officers and their ages as of November 30, 1999 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Conrad J. Dell'Oca(1).................... 58 Chairman of the Board and Director
Michael J. Carroll(1).................... 56 President and Chief Executive Officer and Director
Raymond Grammer.......................... 62 Chief Financial Officer
Douglas E. Klint......................... 49 Vice President, Secretary, and General Counsel
John R. Walsh............................ 56 Vice President, Operations, EDA Division
Ronald K, Bell(2)(3)..................... 56 Director
David K. Lam (2)(3)...................... 56 Director
</TABLE>
- ---------------
(1) Member of the Option Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
BACKGROUND OF EXECUTIVE OFFICERS
Conrad Dell'Oca has served as Chairman of the Board since February 1997. He
also served as Chief Executive Officer and President from February 1992 to
January 1999. From May 1981 to 1991, Mr. Dell'Oca was Vice President, Research
and Development of LSI Logic Corporation ("LSI Logic"), a semiconductor
manufacturer. Mr. Dell'Oca received a B.A.Sc. and M.A.Sc. in Engineering Physics
and a Ph.D. in Electrical Engineering from the University of British Columbia.
Michael J. Carroll has served as President and Chief Executive Officer and
a Director of Aspec since October 1999. From December 1994 to December 1998, Mr.
Carroll served as Group President of the Preco Electronics Division of Preco,
Inc., a manufacturing company. Mr. Carroll also served as President of Sensym,
Inc., a subsidiary of BTR, Ltd. from July 1992 to December 1994. Mr. Carroll
received a B.S. degree in business and industrial management from San Jose State
University in 1965.
Douglas E. Klint has served as Vice President, Secretary and General
Counsel of Aspec since August 1998. Mr. Klint has also served as Acting
President and Acting Chief Executive Officer from January 1999 to October 1999.
From December 1994 to August 1998, Mr. Klint served as Vice President, Secretary
and General Counsel of GateField Corporation, which develops and sells field
programmable gate arrays. From December 1984 to December 1994, Mr. Klint served
as Vice President, Secretary and General Counsel of
12
<PAGE> 13
Zycad Corporation which developed and sold EDA hardware and software. Mr. Klint
received a B.A. degree in Economics and Business Administration from Gustavus
Adolphus College in Minnesota in 1972 and a Juris Doctor degree from the William
Mitchell College of Law in 1976.
Raymond Grammer has served as Chief Financial Officer of Aspec since
October 1999. From December 1997 to October 1999, Mr. Grammer served as Chief
Financial Officer of Eclipse International, Inc. an intellectual property
company. From June 1991 to December 1997, Mr. Grammer served as Chief Financial
Officer of ICELabs, Inc., an electronics company. Mr. Grammer received his B.S.
degree in 1959 from the University of Illinois.
John R. Walsh has served as Vice President Operations, EDA Division, of
Aspec since October 1999. From October 1997 to October 1999, he served as
President and Chief Executive Officer of Novo Systems Corporation. From February
1991 to October 1997, Mr. Walsh served as Vice President, Customer Support, of
Zycad Corporation, a manufacturer of hardware accelerators.
Ronald K. Bell has been a director of Aspec since March 1999. Mr. Bell has
served as Vice President, Communications Products of Micro Linear Corporation,
an analog and mixed semiconductor company, since June 1999. From February 1998
to June 1999, Mr. Bell was Chief Executive Officer of Equator Technologies,
Inc., a multimedia processor company. From October 1997 to 1998, Mr. Bell was
Vice President, Engineering and Chief Operations Officer at Equator
Technologies, Inc. From November 1995 to 1997, he was Vice President, Advanced
Architecture and Consumer Products Divisions and General Manager, Consumer
Products Division of LSI Logic. Mr. Bell received a B.S. in Electrical
Engineering and a M.S. in Computer Science from the University of Utah.
David K. Lam has served as director of Aspec since August 1999. Mr. Lam has
served as Chairman of the David Lam Group, a management consulting firm for high
growth technology companies, since 1988. Dr. Lam is currently a director of
Integrated Telecom Express, Inc. and Tru-Si Technologies, Inc.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between our directors or officers.
ITEM 2. PROPERTIES
We occupy approximately 29,000 square feet of office space in Sunnyvale,
California, pursuant to a lease which expires in November 2001. As a result of
our acquisition of Inbox Software, we also occupy approximately 7072 square feet
of office space in Milpitas, California under a lease which expires in April
2003. In addition, we also occupy approximately 9,600 square feet of office
space in Longmont, Colorado under a lease which expires in February 2002 as a
result of our acquisition of SIS Microelectronics. We also maintain sales
offices in Boca Raton, Florida, San Diego, California and Tokyo, Japan. We
believe that our existing facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
SUPERIOR COURT FOR THE STATE OF CALIFORNIA
CLASS ACTION LAWSUIT
On July 1, 1998, a class action lawsuit, Howard Jonas, et al. v. Aspec
Technology, Inc., et al., No. CV-775037 ("the Jonas Complaint"), was filed in
the Superior Court for the State of California, County of Santa Clara. The Jonas
Complaint alleged that Aspec and certain of our officers, directors and the
underwriters of our initial public offering, violated California Corporations
Code Sections 25400 and 25500, and California Business and Professions Code
Sections 17200 and 17500 by making false and misleading statements about Aspec's
financial condition. The action was purportedly brought on behalf of all persons
who purchased Aspec stock during the period from April 28, 1998 through June 25,
1998. On July 2, 1998, July 27, 1998, and August 17, 1998, three additional
complaints were filed in state court against Aspec and certain of our officers,
directors, entitled respectively, William Neuman, et al. v. Aspec Technology,
Inc., et al., No. CV-775089; Martin L. Klotz, on behalf of the Martin Klotz
Defined Benefit Profit Sharing Plan, et al. v. Aspec Technology, Inc., et al.,
No. CV-775591 (the "Klotz Complaint"); Glen O. Ressler and Thelma M.
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<PAGE> 14
Ressler, et al., v. Aspec Technology, Inc., et al. No. CV-776065. In addition to
alleging the same violations of the Corporations Code as the three other
complaints, the Klotz Complaint also alleged violations of Sections 11, 12, and
15 of the Securities Act of 1933, and a class period of April 28, 1998 through
June 30, 1998. The complaints sought unspecified damages.
On January 29, 1999, the plaintiffs consolidated the pending class action
cases and filed a Consolidated Amended Complaint, styled Howard Jonas, et al. v.
Aspec Technology, Inc., et al., No. CV-775037. The Consolidated Amended
Complaint was purportedly brought on behalf of all persons who purchased Aspec's
stock between April 27, 1998 and June 30, 1998, alleged that Aspec and certain
of our officers and directors, as well as our underwriters, violated Sections
25400 and 25500 of the California Corporations Code, and Sections 11 and 15 of
the Securities Act of 1933 (except as to the underwriters). On June 7, 1999,
Aspec and certain of the individual defendants filed demurrers to the
Consolidated Complaint. On June 9, 1999, the plaintiffs filed a motion for
summary adjudication of their claims against Aspec under Section 11 of the
Securities Act. The plaintiffs also moved to certify a plaintiff class.
On August 26, 1999, the court heard argument on the defendants' demurrers.
The court sustained the demurrers in part and overruled them in part.
Specifically, the court held that the plaintiffs had not pleaded their claims
under California Corporations Code Section 25400 with sufficient particularity
and granted plaintiffs leave to amend this claim. The court overruled the
defendants' demurrers to the Section 11 claim. Following that hearing,
plaintiffs withdrew their motion for summary adjudication. Thereafter,
plaintiffs filed their First Amended Class Action Complaint, under seal, on
October 18, 1999.
On January 11, 2000, the defendants filed demurrers to Count I of the First
Amended Complaint, which alleged claims under California Corporations Code
Sections 25400/25500. The Aspec Defendants demurred to Count I on the basis that
plaintiffs had not pleaded facts demonstrating that the defendants had acted
with scienter. The Aspec Defendants also moved to strike certain allegations in
the complaint. The motions were fully briefed, and the court heard oral argument
on defendants' demurrers and motion to strike and plaintiffs' motion for class
certification on February 24, 2000. The court overruled the defendants'
demurrers, denied the motion to strike, and took the motion for class
certification under submission.
DERIVATIVE LAWSUIT
Certain of our current and former officers, directors and shareholder
entities were also named as defendants in a derivative lawsuit styled Linda
Willinger, IRA, et al. v. Conrad Dell'Oca et al., No. CV-778007, filed on
November 12, 1998, in the Superior Court of Santa Clara County. The derivative
action alleges facts similar to those in the class action and also alleges that
certain of the directors caused us to conduct the initial public offering in
order to redeem preferred stock they owned or in which they had a beneficial
interest. Aspec filed a demurrer to that Complaint on June 8, 1999 on behalf of
certain of the officer and director defendants and nominal defendant, Aspec.
Thereafter, the plaintiffs requested the defendants' assent to the dismissal of
their complaint and the filing of an amended complaint. Plaintiffs filed their
First Amended Shareholders' Derivative Complaint on September 2, 1999.
The Aspec Defendants demurred to that complaint on November 12, 1999 on the
basis that the nominal plaintiffs had failed to make a demand on the Board of
Directors before filing the derivative lawsuit, and that they had also failed to
plead sufficient facts to excuse a pre-suit demand. After the matter was fully
briefed, the court heard argument on January 25, 2000. On January 27, 2000, the
court sustained the defendants' demurrers with sixty days' leave to amend.
Therefore, plaintiffs' amended complaint presently is due to be filed on March
28, 2000.
OTHER LITIGATION
On June 21, 1999, a lawsuit entitled Cadabra Design Technology, Inc. v.
Aspec Technology, Inc., No. CV 782691, was filed in the Superior Court, Santa
Clara County. Plaintiff's complaint sought damages in the amount of $1,594,000
for an alleged breach of a commercial software licensing agreement entered into
by Cadabra Design Technology, Inc. and the Company on or about August 18, 1998.
On August 6, 1999, we answered the complaint -- denying liability and asserting
various affirmative defenses -- and filed a cross-
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<PAGE> 15
complaint seeking damages according to proof and equitable relief for breach of
contract, conversion, and negligent misrepresentation on the part of Cadabra
Design Technology, Inc. On February 16, 2000, the parties executed a Settlement
Agreement and General Release in the case, pursuant to which we will pay Cadabra
$600,000 in full and final satisfaction of all claims related to the parties'
software licensing agreement. On February 22, 2000, Cadabra filed with the court
a Notice of Settlement and Conditional Dismissal, and has agreed and represented
to the court that it will file a request for dismissal within five days after
receiving the aforementioned settlement payment. This settlement has been
accrued for as of November 30, 1999.
Aspec Technology, Inc. v Compaq Computers, Inc. was filed on December 28,
1998 in the Superior Court of California, Santa Clara County, No. CV778943. By
our complaint, we sought to collect the principal sum of $403,344, plus
interest, attorney's fees and costs, from Compaq, alleging that Compaq had
breached a contract to purchase certain of Aspec's library software. Compaq
filed a counter claim alleging that we had breached the contract by failing to
deliver in functional form the promised software on the schedule promised, as
well as alleging fraudulent misrepresentation relating to the contract. The
counter claim alleges unspecified damages in excess of $25,000. Documents have
been exchanged and certain written discovery has been undertaken, but no
testimony has been taken in the case. Compaq has offered to settle the matter by
paying us $175,000. Aspec has not accepted the offer and we are continuing to
discuss resolution with Compaq. Trial is scheduled for April 24, 2000.
On September 23, 1999, a lawsuit entitled Lesley Nemeth v. Aspec Technology
Inc., was filed in Superior Court, Santa Clara County, No. DC383204. Plaintiff
is a former consultant to us who seeks in her complaint damages in the sum of
$12,600 plus interest and attorney's fees. On November 23, 1999 the court
ordered the matter to binding arbitration administered by the American
Arbitration Association. We are awaiting plaintiff's filing of the arbitration
claim.
NASDAQ INQUIRY
On September 4, 1998, we received an informal request for information from
the NASDAQ Listing Investigations Staff. NASDAQ requested information concerning
our financial accounting and internal controls. We have provided information in
response to the informal inquiry. NASD held a de-listing inquiry on December 17,
1998 at which we appeared through counsel and provided information. As of
February 25, 1999, the NASD has determined that we would remain listed on the
NASDAQ.
SEC INQUIRY
In January 1999, we received an informal inquiry from the Securities and
Exchange Commission ("SEC") Staff which we believe relates to our restatement of
our financial statements in 1998. We are continuing to provide information in
response to the SEC's requests.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET FOR COMMON STOCK
Our Common Stock has been quoted on the Nasdaq National Market since our
initial public offering in April 1998. Prior to such date, there was no public
market for the Common Stock. The following table sets forth, for the fiscal
quarters indicated, the high and low sale prices per share for the Common Stock
as reported on the Nasdaq National Market. These prices are over-the-counter
market quotations which reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
Our Common Stock is currently quoted under the symbol "ASPC."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NOVEMBER 30,
1999
------------------
HIGH LOW
------- -------
<S> <C> <C>
Fourth quarter (from September 1, 1999 to November 30,
1999)..................................................... $2.06 $0.78
Third quarter (from June 1, 1999 to August 31, 1999)........ 1.00 0.56
Second quarter (from March 1, 1999 to May 31, 1999)......... 1.47 0.66
First quarter (from December 1, 1998 to February 28,
1999)..................................................... 2.16 1.13
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NOVEMBER 30,
1998
------------------
HIGH LOW
------- -------
<S> <C> <C>
Fourth quarter (from September 1, 1998 to November 30,
1998)..................................................... $ 4.25 $ 1.50
Third quarter (from June 1, 1998 to August 31, 1998)........ 11.625 2.125
Second quarter (from April 25, 1998 to May 31, 1998)........ 15.50 12.25
</TABLE>
HOLDERS OF RECORD
As of November 30, 1999, there were approximately 2,334 beneficial holders
of our Common Stock.
DIVIDENDS
We have never declared or paid cash dividends. We currently intend to
retain any earnings for use our its business and do not anticipate paying any
cash dividends on our capital stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On September 1, 1999, in connection with our acquisition of Chip & Chip,
Inc., we issued an aggregate of 2,000,000 shares of our Common Stock to the Chip
& Chip, Inc. shareholders. The shares were issued pursuant to Section 4(2) and
Regulation D promulgated under the Securities Act of 1933, as amended.
On September 1, 1999, in connection with our acquisition of Verilux Design
Corporation, we issued an aggregate of 2,127,400 shares of our Common Stock to
the Verilux Design Corporation shareholders. The shares were issued pursuant to
Section 4(2) and Regulation D promulgated under the Securities Act of 1933, as
amended.
On October 20, 1999, in connection with our acquisition of Novo Systems
Corporation, we issued an aggregate of 1,600,000 shares of our Common Stock to
the Novo Systems Corporation shareholders. The shares were issued pursuant to
Section 4(2) and Regulation D promulgated under the Securities Act of 1933, as
amended.
On December 3, 1999, in connection with our acquisition of Inbox Software,
we issued 2,400,000 shares of our Common Stock to the Inbox shareholders. The
shares were issued pursuant to Section 4(2) and Regulation D promulgated under
the Securities Act of 1933, as amended.
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<PAGE> 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue.............................. $ 6,640 $14,999 $20,278 $ 23,090 $ 7,463
Cost of revenue...................... 2,307 4,702 8,763 16,688 13,379
------- ------- ------- -------- --------
Gross profit (loss).................. 4,333 10,297 11,515 6,402 (5,916)
------- ------- ------- -------- --------
Operating expenses:
Research and development.......... 445 921 1,190 2,640 5,564
Sales and marketing............... 1,387 3,526 6,537 5,952 3,724
General and administrative........ 1,093 1,994 2,363 4,576 6,284
Write-off of purchased
technology...................... -- -- -- 700 3,097
Amortization -- Goodwill.......... -- -- -- 418 1,081
Write down of software............ -- -- -- -- 1,799
------- ------- ------- -------- --------
Total operating expenses..... 2,925 6,441 10,090 14,286 21,377
------- ------- ------- -------- --------
Income (Loss) from operations........ 1,408 3,856 1,425 (7,884) (27,293)
Equity losses from joint venture..... -- -- -- -- (574)
Interest income, net................. 56 310 173 1,614 1,610
------- ------- ------- -------- --------
Income (Loss) before income taxes.... 1,464 4,166 1,598 (6,270) (26,257)
Provision for income taxes........... 585 1,708 639 264 41
------- ------- ------- -------- --------
Net income (loss).................... 879 2,458 959 (6,534) (26,298)
Accretion of redeemable preferred
stock............................. -- 392 823 4,328 --
------- ------- ------- -------- --------
Income (loss) attributable to common
stockholders...................... $ 879 $ 2,066 $ 136 $(10,862) $(26,298)
======= ======= ======= ======== ========
Diluted earnings (loss) per
share(1).......................... $ 0.04 $ 0.09 $ 0.01 $ (0.43) $ (0.91)
======= ======= ======= ======== ========
Diluted average shares outstanding... 20,172 22,397 22,585 25,258 28,831
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $ 944 $ 3,544 $ 3,077 $43,068 $19,646
Total assets......................... 5,046 15,866 14,905 70,463 45,759
Long term obligations................ -- -- -- 1,052 324
Redeemable Preferred Stock........... -- 13,345 14,168 -- --
Redeemable Common Stock.............. -- 7,116 7,116 -- --
Total stockholders' equity
(deficiency)...................... 1,798 (14,223) (13,859) 58,775 35,941
</TABLE>
- ---------------
(1) See Note 16 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing earnings per share.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are based on current expectations and include various risks and uncertainties
that could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth below and
under "Other Factors Affecting Future Operating Results."
COMPANY OVERVIEW
Aspec was founded in December 1991 to develop, market and support
Semiconductor Intellectual Property ("SIP") to enable customers to develop
complex Semiconductor Integrated Circuits ("ICs") ICs. Through fiscal 1992, we
were principally engaged in the development of our first products and the
establishment of customer relationships. We recognized our initial revenue in
fiscal 1993 as SIP products were completed for customers designing gate
array-based ASICs. In fiscal 1993, 1994 and 1995, a substantial portion of our
revenue was derived from the license of SIP products to vertically integrated
semiconductor manufacturers that were seeking to enter the merchant ASIC market.
During these years, we also expanded our development efforts. By fiscal 1996, we
had enhanced our SIP products for gate array-based ICs and had developed SIP
products for standard cell-based ICs supporting a number of foundry processes.
These developments allowed the Company to expand its customer base to include
other integrated semiconductor companies, fabless semiconductor companies,
electronics systems manufacturers and distributors that sell to such entities.
Revenue currently consists primarily of license fees for our SIP products
and design services. A license is required for each foundry used by the customer
as well as for each process technology employed. We also realize revenue from
service and maintenance fees. Typically a customer licenses a bundle of products
which is accompanied by documentation and training. The license of our products
typically involves a lengthy sales cycle of up to 12 months because the license
generally involves a significant commitment of capital by the customer and
because Aspec's SIP is either replacing a customer's proprietary SIP or
introducing entirely new SIP. These SIP products are licensed to customers on a
per design basis, a per site basis or an enterprise basis.
Our historical SIP Business experienced declining revenues and lost money
in fiscal 1998 and 1999. This was caused in part by the competitive pressure of
"free libraries" being offered by competitors in the library business under a
royalty based business model introduced in late 1998. SIP libraries essentially
became a free commodity. The design services business also experienced declining
revenues due to off-shore competition based in foreign countries which have a
much lower labor rate and cost structure.
It became apparent in fiscal 1999 that we could not sustain or grow the
business based on SIP libraries and design services. We needed to diversify our
business and establish a new business direction in order to regain profitability
and growth. The best way to leverage our knowledge and experience in silicon
process, design methodology and Electronic Design Automation ("EDA") software
tool expertise was for us to develop Silicon Intelligent - TM -- EDA design
tools that address current gaps and inadequacies in semiconductor design
technology and that increase semiconductor design productivity.
As part of our strategy to develop silicon intelligent EDA design tools, in
June 1999, we entered into an agreement to acquire Verilux Design Corporation in
exchange for the issuance of an aggregate of 2,127,400 shares of Common Stock
and $872,600 cash. Verilux Design is an EDA company located in Santa Clara,
California and had 5 employees. The acquisition was completed in September 1999,
was accounted for using the purchase method and resulted in a charge to
in-process research and development of $1.4 million in our fiscal quarter ended
November 30, 1999. We recorded $1.2 million of goodwill as part of this
acquisition which will be amortized evenly over a five-year period.
We also entered into an agreement to acquire Chip & Chip, Inc. in July 1999
in exchange for the issuance of an aggregate of 2,000,000 shares of Common Stock
and $800,000 cash. Chip & Chip is an EDA product company located in Santa Clara,
California and had 5 employees. The acquisition was completed in
18
<PAGE> 19
September 1999, was accounted for using the purchase method and resulted in a
charge to in-process research and development of $1.0 million in our fiscal
quarter ended November, 1999. We recorded $1.6 million of goodwill as part of
this acquisition which will be amortized evenly over a five-year period.
We also entered into an agreement to acquire Novo Systems Corporation in
October 1999 in exchange for the issuance of an aggregate of 1,600,000 shares of
Common Stock and $1,000,000 cash. Novo Systems is an EDA product and services
company located in Milpitas, California and had 23 employees. The acquisition
was completed in October 1999, was accounted for using the purchase method and
resulted in a charge to in-process research and development of $0.7 million in
our fiscal quarter ended November, 1999. No goodwill was recorded as part of
this acquisition.
As part of our strategy to enter the Inter Enterprise Collaboration ("IEC")
content management market, we entered into an agreement to acquire Inbox
Software, Inc. ("Inbox") in November 1999 in exchange for the issuance of an
aggregate of 1,205,866 shares of Common Stock, the assumption of 1,194,134
options and $7,640,000 cash. Inbox is an IEC content management company located
in Milpitas, California and had 21 employees. The acquisition was completed in
December 1999, and was accounted for using the purchase method, Inbox had
revenues for fiscal 1999 of $0.3 million and a net loss of $2.4 million.
A significant portion of our revenue was recognized on a percentage of
completion method based upon actual costs incurred. The completion period
typically ranges from one to three months. Accordingly, revenue in any quarter
is dependent on progress towards completion of projects. We have in the past
experienced delays in the progress of certain projects, and there can be no
assurance that such delays will not occur with respect to future projects. Any
delay or failure to achieve such progress could result in:
- a delay in the ability to bill for or collect payment for work previously
performed,
- damage to customer relationships and our reputation,
- diversion of engineering resources or
- a delay in the market acceptance of our products,
Any of which could have a material adverse effect on our business,
operating results and financial condition. In addition, these contracts may
generally be canceled without cause, and if a customer cancels or delays
performance under any such contracts, our business, operating results and
financial condition could be materially adversely affected.
With the transition of our business to concentrating on EDA and IEC
software products, the majority of our future revenue will likely consist of
software license revenue and related consulting and maintenance services
revenue.
Engineering efforts devoted to developing products or providing services
for which revenue is recognized on a percentage of completion basis are recorded
as cost of revenue. Engineering efforts devoted to developing our core
technology and products not requiring adaptation are recorded as research and
development expense. As a result of our engineering efforts and acquisitions, we
have a substantial base of technology, which we are able to reuse in other
product offerings. We expect to continue to devote significant resources to our
various engineering efforts.
A significant portion of our revenue is derived from customers outside the
United States, and we anticipate that international revenue will continue to
account for a significant portion of our total revenue. Revenue from customers
outside the United States, substantially all of whom are located in Asia,
accounted for 53%, 54% and 32% of revenue in fiscal 1997, 1998 and 1999,
respectively. Although we do not believe that we experienced any material
adverse impact in revenue as a result of the financial dislocations that
occurred in certain Asian countries during 1997, 1998 and 1999, we have
experienced a lengthening of the payment period for accounts receivables from
certain Asian-based customers. At November 30, 1999, approximately 72% of our
accounts receivable (including unbilled receivables) were from Asian-based
customers. Although we currently believe, based in part on continuing
discussions with these customers, that our existing accounting reserves are
adequate given the estimated exposure related to all of its accounts receivable,
there can be no
19
<PAGE> 20
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 our ability to collect its accounts
receivable or on its business, operating results and financial condition.
Our international business involves a number of risks, including:
- the impact of possible recessionary environments in foreign economies,
- political and economic instability, exchange rate fluctuations,
- longer receivables collection periods and greater difficulty in accounts
receivable collection from distributors and customers,
- difficulty in managing distributors or sales representatives,
- unexpected changes in regulatory requirements,
- reduced or limited protection for intellectual property rights,
- export license requirements,
- tariffs and other trade barriers and
- potentially adverse tax consequences.
Although we price our products and services mainly in United States
dollars, currency exchange fluctuations could have a material adverse effect on
our business to the extent that our pricing is not competitive with products
priced in local currencies. The results of the Novo Systems Japanese subsidiary
are maintained in Japanese yen and translated into United States dollars. We do
not currently hedge against foreign currency fluctuations. See "Other Factors
Affecting Future Operating Results -- Risks Associated With International
Operations."
20
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data as a percentage of revenue:
YEARS ENDED NOVEMBER 30, 1998 AND 1999
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1999
($000'S)
<TABLE>
<CAPTION>
SIS MICRO-
ASPEC ELECTRONICS INC. EDA TOTAL
------- ---------------- ------ -------
<S> <C> <C> <C> <C>
Revenue........................................... 4,779 2,513 171 7,463
Cost of revenue................................... 11,557 1,728 94 13,379
------- ----- ------ -------
Gross (loss) profit............................. (6,778) 785 77 (5,916)
Operating expenses:
Research and development........................ 4,682 569 313 5,564
Sales and marketing............................. 3,658 74 (8) 3,724
General and administrative...................... 5,141 614 357 6,112
Write off in process research and development... 3,097 3,097
Write off software.............................. 1,799 1,799
Amortization -- goodwill........................ 669 172 240 1,081
------- ----- ------ -------
Total operating expenses................ 15,949 1,429 3,999 21,377
Loss from operations.............................. (22,727) (644) (3,922) (27,293)
Interest and other income, net.................... 1,617 5 (12) 1,610
Equity losses from joint venture.................. (574) (574)
------- ----- ------ -------
Loss before income taxes.......................... (21,684) (639) (3,934) (26,257)
Provision for income taxes........................ 41 41
------- ----- ------ -------
Net loss.......................................... (21,725) (639) (3,934) (26,298)
======= ===== ====== =======
</TABLE>
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1999
(PERCENTAGES)
<TABLE>
<CAPTION>
SIS MICRO-
ASPEC ELECTRONICS INC. EDA TOTAL
------- ---------------- ------ -----
<S> <C> <C> <C> <C>
Revenue............................................ 100% 100% 100% 100%
Cost of revenue.................................... 242 69 55 179
---- ---- ------ ----
Gross (loss) profit.............................. (142) 31 45 (79)
Operating expenses:
Research and development......................... 98 23 184 75
Sales and marketing.............................. 77 3 (5) 50
General and administrative....................... 108 24 210 82
Write off in process research and development.... -- -- 1,822 42
Write off software............................... 37 -- -- 24
Amortization -- goodwill......................... 14 7 141 14
---- ---- ------ ----
Total operating expenses................. 334 57 2,352 287
Loss from operations............................... (476) (26) (2,307) (366)
Interest and other income, net..................... 34 1 (7) 22
Equity losses from joint venture................... (12) -- -- (8)
---- ---- ------ ----
Loss before income taxes........................... (454) (25) (2,314) (352)
Provision for income taxes......................... 1 -- -- 1
---- ---- ------ ----
Net loss........................................... (455)% (25)% (2,314)% (353)%
==== ==== ====== ====
</TABLE>
21
<PAGE> 22
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1998
($000'S)
<TABLE>
<CAPTION>
SIS MICRO-
ASPEC ELECTRONICS INC. EDA TOTAL
------- ---------------- --- -------
<S> <C> <C> <C> <C>
Revenue............................................ 22,527 563 -- 23,090
Cost of revenue.................................... 15,966 722 -- 16,688
------ ------ -- -------
Gross profit (loss).............................. 6,561 (159) -- 6,402
Operating expenses:
Research and development......................... 2,205 435 -- 2,640
Sales and marketing.............................. 5,952 -- -- 5,952
General and administrative....................... 4,206 370 -- 4,576
Write off in process research and development.... 700 -- -- 700
Amortization -- goodwill......................... 418 -- -- 148
------ ------ -- -------
Total operating expenses................. 13,481 805 -- 14,286
Loss from operations............................... (6,920) (964) -- (7,884)
Interest and other income, net..................... 1,601 13 -- 1,614
Equity losses from joint venture................... -- -- -- --
------ ------ -- -------
Loss before income taxes........................... (5,319) (951) -- (6,270)
Provision for income taxes......................... 76 188 -- 264
------ ------ -- -------
Net loss........................................... (5,395) (1,139) -- (6,534)
Accretion of redeemable preferred stock............ 4,328 -- -- 4,328
------ ------ -- -------
Net Loss attributable to common stockholders....... (9,723) (1,139) -- (10,862)
====== ====== == =======
</TABLE>
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1998
(PERCENTAGES)
<TABLE>
<CAPTION>
SIS MICRO-
ELECTRONICS
ASPEC INC. EDA TOTAL
----- ------------ --- -----
<S> <C> <C> <C> <C>
Revenue.................................................... 100% 100% -- 100%
Cost of revenue............................................ 71 128 -- 72
--- ---- --- ---
Gross profit (loss)...................................... 29 (28) -- 28
Operating expenses:
Research and development................................. 10 77 -- 11
Sales and marketing...................................... 26 -- -- 26
General and administrative............................... 19 66 -- 20
Write off in process research and development............ 3 -- -- 3
Amortization -- goodwill................................. 2 -- -- 2
--- ---- --- ---
Total operating expenses......................... 60 143 -- 62
Loss from operations....................................... (31) (171) -- (34)
Interest and other income, net............................. 7 2 -- 7
Loss before income taxes................................... (24) (169) -- (27)
Provision for income taxes................................. -- 33 -- 1
--- ---- --- ---
Net loss................................................... (24) (202) -- (28)
Accretion of redeemable preferred stock.................... 19 -- 19
---
Net loss attributable to common stockholders............... (43)% (202)% -- (47)%
=== ==== === ===
</TABLE>
As of November 30, 1999, the Company operated in two segments, Aspec
Technology, Inc. and SIS Microelectronics, Inc. SIS is treated as a separate
segment since SIS has separate financial information and
22
<PAGE> 23
this is reported directly to the Chief Executive Officer. For fiscal 1999, Novo,
Verilux and Chip & Chip are included together in EDA in the above tables. The
"Aspec" column includes the results of the historical Aspec SIS business as well
as corporate expenses not specifically attributable to a particular segment.
The consolidated results for the fourth quarter of 1999 and for the fiscal
year ended November 30, 1999, include the results of Verilux and Chip & Chip
since their acquisition on September 2, 1999. The results from Novo Systems are
included for the period from October 20, 1999 through fiscal year ended November
30, 1999.
The activities of Verilux and Chip & Chip before and during the fourth
quarter of 1999 involved R&D expenditures and general administrative expenses.
Novo Systems activities for the period from October 20, 1999 through fiscal
year ended November 30, 1999, involved mainly activities surrounding Zycad
maintenance support.
Revenues. Revenue for Aspec decreased by 79% from $22.5 million in fiscal
1998 to $4.8 million in fiscal 1999. The decline in revenue in fiscal 1999
compared with fiscal 1998 was primarily attributable to continued decline of our
SIP and design services businesses. Also, in the fourth quarter, 1999 we decided
to refocus our efforts on our new EDA business further contributing to a decline
in revenue from our SIP businesses.
International revenue for Aspec accounted for 32% of revenue in fiscal 1999
compared to 65% of revenue in fiscal 1998.
Revenue for SIS increased by 316% from $0.6 million in fiscal 1998 to $2.5
million in fiscal 1999. This increase in revenue in fiscal 1999 compared with
fiscal 1998 was attributable to an increase in product and service offerings.
International revenue for SIS accounted for 5% of revenue in fiscal 1999 and
fiscal 1998.
Revenue from our EDA Business for the period since the date of the
acquisitions through fiscal year ended November 30, 1999 were $0.17 million
derived from maintenance services.
Cost of revenue. Cost of revenue for Aspec primarily represents the costs
of personnel and other operating expenses incurred in the development and
production of SIP products to customer specifications. Cost of revenue decreased
by 28% from $16.0 million in fiscal 1998 to $11.6 million in fiscal 1999. Cost
of revenue as a percentage of revenue was 71% and 242% in fiscal 1998 and fiscal
1999, respectively. The absolute dollar decreases in cost of revenue and the
increases in cost of revenue as a percentage of revenue in fiscal 1999, compared
with fiscal 1998, were due to,
- reduced headcount (e.g., turnover and reduction in force), and
- significantly decreased revenue levels.
Due primarily to these factors, our gross margin percentage was adversely
effected in fiscal 1999. We expect cost of revenue as a percentage of revenue to
fluctuate in future periods depending on the mix between development program
revenues and revenues from previously developed products.
Cost of revenue for SIS primarily represents the cost of personnel and
other operating expenses incurred in the development and production of products
and services to customers. Cost of revenue increased by 142% from $0.7 million
in fiscal 1998 to $1.7 million in fiscal 1999. Cost of revenue as a percent of
revenue was 128% and 69% in fiscal 1998 and fiscal 1999, respectively. The
absolute dollar decrease in cost of revenue and the increase in cost of revenue
as a percentage of revenue in fiscal 1999 compared with fiscal 1998, were due
primarily to the decrease in revenue levels. Cost of revenue for the EDA
Business was insignificant.
Research and development. Research and development expenses represent the
cost of engineering personnel and other operating expenses incurred in the
development and enhancement of our core technology and products not requiring
significant adaptation. Research and development expenses for Aspec increased by
114% from $2.2 million in fiscal 1998 to $4.7 million in fiscal 1999. Research
and development expense as a percentage of revenue was 10% and 98% in fiscal
1998 and fiscal 1999, respectively. The absolute dollar increases in research
and development expenses and the increases in research and development costs as
a
23
<PAGE> 24
percentage of revenue in fiscal 1999, compared with fiscal 1998, were primarily
due to increased work on internal SIP business rather than standard libraries
during fiscal 1999 as well as investment in the acquired EDA products during the
fourth quarter of fiscal 1999. We expect research and development expense to
increase in absolute dollars in fiscal 2000.
Research and development expenses for SIS increased by 50% from $0.4
million in fiscal 1998 to $0.6 million in fiscal 1999. Research and development
expense as a percentage of revenue was 77% and 23% in fiscal 1998 and fiscal
1999, respectively. The absolute dollar increase in research and development
expenses and the decrease in research and development expenses as a percentage
of revenue in fiscal 1999, compared with fiscal 1998, were due to investments in
new products and an increase in revenue.
Research and development expense for the EDA Business was $0.3 million
since the date of acquisition through fiscal year ended November 30, 1999.
Sales and marketing. Sales and marketing expenses consist of salaries and
commissions paid to internal sales and marketing personnel and sales
representatives, promotional costs and related operating expenses. Sales and
marketing expenses for Aspec decreased by 40% from $6.0 million in fiscal 1998
to $3.6 million in fiscal 1999. Sales and marketing expense as a percentage of
revenue was 26% and 77% in fiscal 1998 and fiscal 1999, respectively. The
absolute dollar decreases in sales and marketing expenses in fiscal 1999,
compared with fiscal 1998, were due to decreased headcount as well as less
expenses and commissions due to lower sales volume.
Sales and marketing expenses for SIS and the EDA Business were
insignificant for fiscal years 1998 and 1999.
General and administrative. General and administrative expenses for Aspec,
which includes all corporate, general and administrative expenses, increased by
21% from $4.2 million in fiscal 1998 to $5.1 million in fiscal 1999. General and
administrative expenses as a percentage of revenue was 19% and 108% in fiscal
1998 and fiscal 1999, respectively. The absolute dollar increases in general and
administrative expenses and the increases in general and administrative expenses
as a percentage of revenue in fiscal 1999, compared with fiscal 1998, were due
to increased legal fees resulting from the lawsuits, as well as an increase in
the bad debt expense.
General and administrative expenses for SIS increased by 50% from $0.4
million in fiscal 1998 to $0.6 million in 1999. General and administrative
expenses as a percentage of revenue were 66% and 24% in fiscal 1998 and fiscal
1999, respectively. The absolute dollar increase in general and administrative
expenses and the decrease in general and administrative as a percentage of
revenue in fiscal 1999, compared with fiscal 1998, were due primarily to an
increase in shared expenses and increased revenue.
General and administrative expenses for the EDA Business were $0.4 million
from the date of acquisition through fiscal year ended November 30, 1999.
The $3.1 million written off to purchased technology in fiscal 1999 related
to the acquisitions of Novo Systems, Chip & Chip, and Verilux (see Note 6 to the
Condensed Consolidated Financial Statements). The Company recorded $2.9 million
of goodwill as part of these acquisitions which will be amortized evenly over a
five-year period.
A one-time charge of $1.8 million was incurred to write down the third
party software tools used in the SIP Business to their realizable value.
Interest income, net. Net interest income for Aspec remained relatively
flat at $1.6 million in both fiscal 1998 and fiscal 1999. Net interest income as
a percentage of revenue was 7% and 34% in fiscal 1998 and 1999, respectively.
SIS had no interest income in either fiscal 1998 or fiscal 1999.
Foreign Currency. Balance sheet accounts of Novo Systems' foreign
subsidiary in Japan are translated into U.S. dollars at exchange rates
prevailing at balance sheet dates. Revenue, costs and expenses are translated
into U.S. dollars at average rates for the period. Gains and losses resulting
from foreign exchange transactions are included in the statement of operations
and were not significant during the period presented.
24
<PAGE> 25
Provision for income taxes. The provision for income taxes for Aspec was
$76 thousand and $41 thousand in the fiscal years 1998 and 1999, respectively.
Excluding the impact of the one-time non-deductible write-off of purchased
technology, write down of software and the increase in valuation allowance
recorded against deferred tax assets, the effective tax rate was (1)% for fiscal
1999, compared with 38% in fiscal 1998. The difference between our effective tax
rate and the U.S. federal statutory income tax rate is primarily due the tax
effect of purchased technology that is non-deductible for tax purposes, the
valuation allowance recorded against deferred assets and state taxes net of
federal benefit. The provision for income taxes for SIS for fiscal 1998 was
$188,000. There was no provision for fiscal 1999.
YEARS ENDED NOVEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------
1998 1997
---- ----
<S> <C> <C>
Revenue..................................................... 100% 100%
Cost of revenue............................................. 72 43
--- ---
Gross profit................................................ 28 57
Operating expenses:
Research and development.................................. 11 6
Sales and marketing....................................... 26 32
General and administrative................................ 20 12
Write-off of purchased technology......................... 3 --
Amortization -- Goodwill.................................. 2 --
--- ---
Total operating expenses.......................... 62 50
--- ---
(Loss) income from operations............................... (34) 7
Interest and other income, net.............................. 7 1
Equity losses from joint venture............................ -- --
--- ---
(Loss) income before income taxes........................... (27) 8
Provision for income taxes.................................. 1 3
--- ---
Net (loss) income........................................... (28) 5
Accretion of redeemable preferred stock..................... 19 4
--- ---
Net (Loss) income attributable to common stockholders....... (47)% 1%
=== ===
</TABLE>
Revenues. Revenue for Aspec increased by 14% from $20.3 million in fiscal
1997 to $22.5 million in fiscal 1998. The growth in revenue in fiscal 1998
compared with fiscal 1997 was primarily attributable to our termination of a
relationship with a foreign distributor which resulted in $2.9 million of
revenues being recognized in the third quarter of fiscal 1998.
International revenue for Aspec accounted for 65% of revenue in fiscal 1998
compared to 53% of revenue in fiscal 1997.
SIS was acquired in 1998 and no financial results for SIS were included for
fiscal year 1997.
Cost of revenue. Cost of revenue increased by 82% from $8.8 million in
fiscal 1997 to $16.0 million in fiscal 1998. Cost of revenue as a percentage of
revenue was 43% and 71% in fiscal 1997 and fiscal 1998, respectively. The
absolute dollar increases in cost of revenue and the increases in cost of
revenue as a percentage of revenue in fiscal 1998, compared with fiscal 1997,
were due to:
- hiring of additional engineering personnel and related expenses
associated with customer funded development programs,
- start-up costs associated with our chip design service group,
- costs of the additional personnel who joined us as a result of the
acquisition of SIS Microelectronics,
- costs of using outside programmers, and
25
<PAGE> 26
- costs of rework under maintenance resulting from process technology
changes implemented by semiconductor foundries for which we had developed
process-related performance data which required recalculation and/or
recharacterization. Such rework was provided as part of customer
maintenance contracts.
Due primarily to these five factors, our gross margin percentage was
adversely effected in fiscal 1998. Research and development. Research and
development expenses for Aspec increased by 83% from $1.2 million in fiscal 1997
to $2.2 million in fiscal 1998. Research and development expense as a percentage
of revenue was 6% and 10% in fiscal 1997 and fiscal 1998, respectively. The
absolute dollar increases in research and development expenses and the increases
in research and development costs as a percentage of revenue in fiscal 1998,
compared with fiscal 1997, were due to increases in engineering personnel,
including additional SIS Microelectronics personnel, and related expenses.
Sales and marketing. Sales and marketing expenses for Aspec decreased by 9%
from $6.5 million in fiscal 1997 to $5.9 million in fiscal 1998. Sales and
marketing expense as a percentage of revenue was 32% and 26% in fiscal 1997 and
fiscal 1998, respectively. The absolute dollar decreases in sales and marketing
expenses in fiscal 1998, compared with fiscal 1997, were due to:
- higher Asian representative sales commissions in fiscal 1997 that did not
recur in fiscal 1998,
- reduced personnel costs as certain field application engineers were
transferred into engineering, and
- decreased advertising and sales promotions.
General and administrative. General and administrative expenses for Aspec
increased by 75% from $2.4 million in fiscal 1997 to $4.2 million in fiscal
1998. General and administrative expenses as a percentage of revenue were 12%
and 19% in fiscal 1997 and fiscal 1998, respectively. The absolute dollar
increases in general and administrative expenses and the increases in general
and administrative expenses as a percentage of revenue in fiscal 1998, compared
with fiscal 1997, were due to:
- addition of new management and administrative personnel and increased
administrative costs, and
- a $1.0 million increase in the Company's bad debt reserve.
The $0.7 million written off to purchased technology in fiscal 1998 related
to the acquisition of SIS Microelectronics (see Note 5 to the Condensed
Consolidated Financial Statements). The Company recorded $3.3 million of
goodwill as part of this acquisition which will be amortized evenly over a
five-year period.
Interest income, net. Net interest income for Aspec increased by 700% from
$0.2 million in fiscal 1997 to $1.6 million in fiscal 1998. Net interest income
as a percentage of revenue was 1% and 7% in fiscal 1997 and 1998, respectively.
The absolute dollar increases in interest income in fiscal 1998, compared with
fiscal 1997, were due to interest income earned on the proceeds from the
Company's initial public offering which was completed in May 1998.
Provision for income taxes. The provision for income taxes for Aspec was
$0.6 million and $76 thousand in the fiscal years 1997 and 1998, respectively.
Excluding the impact of the one-time non-deductible write-off of purchased
technology and the increase in valuation allowance recorded against deferred tax
assets, the effective tax rate was 38% for fiscal 1998, compared with 40% in
fiscal 1997. The difference between our effective tax rate and the U.S. federal
statutory income tax rate is primarily due to the tax effect of purchased
technology that is non-deductible for tax purposes, the valuation allowance
recorded against deferred assets and state taxes net of federal benefit. At
November 30, 1998, we had a deferred tax asset of approximately $4.7 million. We
believed that sufficient uncertainty existed regarding the realizability of the
deferred tax asset, other than to the extent of taxes available from carryback
of current losses, such that a valuation allowance of $2.6 million was provided
against the deferred tax asset.
26
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from license revenue and the net
proceeds of $71.9 million from the initial public offering of Common Stock in
May 1998.
Our operating activities utilized net cash of $0.7 million, $2.1 million,
and $10.0 million in fiscal 1997, 1998, and 1999, respectively. Net cash used in
fiscal 1997 for operating activities was mainly due to changes in income tax
related assets and liabilities. Net cash used in fiscal 1998 was mainly due to
the net loss and increases in accounts receivable. Net cash used in fiscal 1999
was primarily due to the net loss.
Net cash used in investing activities was $3.2 million, $11.4 million, and
$6.3 million in fiscal 1997, 1998, and 1999, respectively. Investing activities
consisted primarily of acquisitions and purchases of software licenses and
equipment.
Net cash provided by financing activities was $0.1 million and $53.5
million in fiscal 1997 and fiscal 1998 respectively, and utilized $2.2 million
in fiscal 1999. In fiscal 1998, financing activities consisted primarily of the
sale of our Common Stock in its initial public offering. In fiscal 1999, cash
utilized in financing activities consisted primarily of the purchase of Treasury
Stock.
At November 30, 1999, we had cash and equivalents of $23.9 million. As of
November 30, 1999, we had a retained deficit of $53.5 million and working
capital of $19.6 million. We anticipate approximately $1.5 million for capital
expenditures over the next 12 months.
On February 24, 2000 we announced the sale of the SIP Business which is
subject to the approval of our Board of Directors, and which will close in three
phases over through April 2000. The purchase price will be paid in cash and is
subject to adjustment at closing. Upon the successful closing of this sale, the
Company will be receiving additional cash. Financial details will be disclosed
after closing.
The Company has suffered recurring losses for the years ended November 30,
1998 and 1999. Aspec's continued existence is dependent on our ability to
achieve profitable operations. We intend to continue to invest in the
development of new products and enhancements to our existing products. Our
future liquidity and capital requirements will depend upon numerous factors,
including:
- the costs incurred in connection with the defense, settlement or payment
of any damages with respect to the class action lawsuits pending against
us and related parties,
- the costs and timing of our product development efforts and the success
of these development efforts,
- the costs and timing of our sales and marketing activities,
- the extent to which our existing and new products gain market acceptance,
- competing technological and market developments,
- the costs involved in maintaining and enforcing patent claims and other
intellectual property rights,
- the level and timing of license revenue,
- available borrowings under line of credit arrangements and
- other factors. We believe that our current cash and investment balances
together with any cash generated from operations will be sufficient to
meet our operating and capital requirements for at least the next 12
months.
We may require additional funds in the future and there is a risk that
financing may not be on terms favorable to us, if available at all.
OTHER FACTORS AFFECTING FUTURE OPERATING RESULTS
Our Future Operating Results are Expected to Fluctuate and We Depend Upon
Timely Project Completion. Our operating results have fluctuated in the past and
are expected to fluctuate significantly on a quarterly and annual basis in the
future as a result of a number of factors including:
27
<PAGE> 28
- the size and timing of customer orders,
- our ability to achieve progress on percentage of completion contracts,
- the length of our sales cycle,
- the timing of new product announcements and introductions by us and our
competitors,
- our ability to successfully develop, introduce and market new products
and product enhancements,
- market acceptance of our products,
- the cancellation or delay of orders from major customers,
- the level of changes to customer requirements due to specific changes
requested by customers,
- our ability to retain our existing personnel and hire additional
personnel, and
- general economic conditions.
These and other factors could have a material adverse effect on our
business, operating results and financial condition.
A significant portion of our revenue is recognized on a percentage of
completion method based upon actual costs incurred. The completion period
typically ranges from one to three months. Accordingly, revenue in any quarter
is dependent on progress towards completion of the project by us. We have in the
past experienced delays in the progress of certain projects and there can be no
assurance that such delays will not occur with respect to future projects. Any
delay or failure to achieve such progress could result in a delay in the ability
to bill for or collect payment for work previously performed, damage to customer
relationships and our reputation, diversion of engineering resources or a delay
in the market acceptance of our products, any of which could have a material
adverse effect on our business, operating results, and financial condition.
In addition, these contracts may generally be canceled without cause, and
if a customer cancels or delays performance under any such contracts, our
business, operating results and financial condition could be materially
adversely affected.
A customer's license of our products may involve a significant commitment
of capital with the attendant delays frequently associated with authorization
procedures for capital expenditures within customer organizations. Our operating
expenses will be based in part on our expectations of future revenue from
product licenses. Accordingly, if we do not realize its expected revenues, our
business, operating results, and financial condition would be materially
adversely affected.
We Need to Manage Growth and Retain Key Personnel. The growth of our
business and expansion of our customer base has placed, and is expected to
continue to place, a significant strain on our management and operations. Our
future success will depend on our ability to identify, attract, hire and retain
skilled employees and to hire replacements for employees that leave us. In this
regard, we have successfully recruited a President/Chief Executive Officer,
Chief Financial Officer, and several additional key management personnel.
We Have Risks Associated With the Acquisitions and Potential
Acquisitions. As part of our strategy to expand our engineering design services
capability, in April 1998, we acquired SIS Microelectronics in exchange for the
issuance of an aggregate of 400,000 shares of Common Stock. SIS Microelectronics
is an engineering design services company located in Longmont, Colorado. The
acquisition was accounted for using the purchase method and resulted in a charge
to in-process research and development of $0.7 million in our fiscal quarter
ended May 31, 1998. The remaining $3.3 million of the purchase price was charged
to goodwill and will be amortized over a five-year period.
As part of our strategy to develop silicon intelligent EDA design tools, in
June 1999, we entered into an agreement to acquire Verilux Design Corporation in
exchange for the issuance of an aggregate of 2,127,400 shares of Common Stock
and $872,600 cash. Verilux Design is an EDA company located in Santa Clara,
California and had 5 employees. The acquisition was completed in September 1999,
was accounted for using the purchase method and resulted in a charge to
in-process research and development of $1.4 million in
28
<PAGE> 29
our fiscal quarter ended November, 1999. We recorded $1.2 million of goodwill as
part of this acquisition which will be amortized evenly over a five-year period.
We also entered into an agreement to acquire Chip & Chip, Inc. in July 1999
in exchange for the issuance of an aggregate of 2,000,000 shares of Common Stock
and $800,000 cash. Chip & Chip is an EDA product company located in Santa Clara,
California and had 5 employees. The acquisition was completed in September 1999,
was accounted for using the purchase method and resulted in a charge to
in-process research and development of $1.0 million in our fiscal quarter ended
November, 1999. We recorded $1.6 million of goodwill as part of this acquisition
which will be amortized evenly over a five-year period.
We also entered into an agreement to acquire Novo Systems Corporation in
October 1999 in exchange for the issuance of an aggregate of 1,600,000 shares of
Common Stock and $1,000,000 cash. Novo Systems is an EDA product and services
company located in Milpitas, California and had 23 employees. The acquisition
was completed in October 1999, was accounted for using the purchase method and
resulted in a charge to in-process research and development of $0.7 million in
our fiscal quarter ended November, 1999. No goodwill was recorded as part of
this acquisition.
As part of our strategy to enter the IEC content management market, we
entered into an agreement to acquire Inbox Software Inc. ("Inbox") in November
1999 in exchange for the issuance of an aggregate of 1,205,866 shares of Common
Stock, the assumption of 1,194,134 options and $7,640,000 in cash. Inbox is an
IEC content management company located in Milpitas, California and had 21
employees. The acquisition was completed in December 1999, and was accounted for
using the purchase method. Inbox had revenues for fiscal 1999 of $0.3 million
and a net loss of $2.4 million.
From time to time, we expect to evaluate other potential acquisitions to
build our SIP expertise. There can be no assurance that:
- we will be able to identify attractive acquisition candidates,
- that we will be able to successfully complete any such acquisition, or
- that we will be able to integrate any acquired company with our other
operations.
In connection with the acquisitions of SIS Microelectronics, Verilux
Design, Chip & Chip, Novo Systems and Inbox or other potential acquisitions, the
failure to successfully and efficiently integrate new employees and operations
of the acquired company with our existing employees and operations or to
successfully manage an acquired company could materially adversely effect our
business, operating results, and financial condition.
The EDA Market is Dominated by a Few Large Companies. With the acquisition
of Verilux Design, Chip & Chip and Novo Systems we are entering the EDA market
with products that compete against those of large, well established companies.
The EDA market is difficult to penetrate and is dominated by four large
companies who collectively have 65% of the EDA market.
We Depend Upon Continuous Product Development and have the Risk of Product
Delays. Our customers are subject to:
- rapid technological change,
- frequent introductions of new products,
- short product life cycles,
- changes in customer demands and requirements, and
- evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, our future success will depend on our ability to continue to
enhance our existing products and to develop and introduce new products that
satisfy increasingly sophisticated customer requirements and that keep pace with
product introductions by EDA tool
29
<PAGE> 30
companies, emerging process technologies and other technological developments in
the semiconductor industry. Any failure by us to anticipate or respond
adequately to changes in technology or customer requirements, or any significant
delays in product development or introduction, would have a material adverse
effect on our business, operating results and financial condition. In this
regard, our gross margin was adversely effected in fiscal 1998 and fiscal 1999,
in part due to process technology changes implemented by the semiconductor
foundries for which we had developed process-related performance data which
required recalculation and/or recharacterization. There can be no assurance that
we will be successful in our product development efforts:
- we could experience difficulties that could delay or prevent the
successful development, introduction and sale of new or enhanced products
or,
- such new or enhanced products may not achieve market acceptance.
We have in the past experienced delays in the release dates of certain of
our products. If release dates of any new significant products or product
enhancements are delayed, our business, operating results and financial
condition would be materially adversely affected. We could also be exposed to
litigation or claims from our customers in the event we do not satisfy our
delivery commitments. There can be no assurance that any such claim will not
have a material adverse effect on our business, operating results and financial
condition.
Our Customers are Concentrated and We Depend on Customers in Asia. We have
been dependent on a relatively small number of customers for a substantial
portion of our annual revenue. In fiscal 1997, Tritech accounted for 10% of
revenue, and our seven largest customers accounted for 48% of our revenue. In
fiscal 1998, Asahi Glass accounted for 13% of our revenue, and five of our
largest customers accounted for 43% of the revenue. In fiscal 1999, one customer
accounted for 17% of our revenue, and five of our largest customers accounted
for 44% of the revenue. We anticipate that sales to customers in Asia will
continue to account for a significant portion of the our revenue. None of our
customers has a written agreement with us that obligates us to license
additional products or to renew our maintenance agreement, and there can be no
assurance that any customer will license additional products or renew our
maintenance agreement. The loss of one or more of our major customers, or
reduced orders by one or more of such customers, could materially adversely
affect our business, operating results and financial condition.
We Have Financial Risks Associated With Our International Operations. A
significant portion of our revenue is derived from customers outside the United
States, and we anticipate that international revenue will continue to account
for a significant portion of our total revenue. Revenue from customers outside
the United States, substantially all of whom are located in Asia, accounted for
53%, 65% and 32% of revenue in fiscal 1997, 1998, 1999, respectively. Although
we do not believe that we experienced any material adverse impact in revenue as
a result of the financial dislocations that occurred in certain Asian countries
during 1997, 1998, and 1998, we have experienced a lengthening of the payment
period for accounts receivables from certain Asian-based customers. At November
30, 1999, approximately 71% of our accounts receivable (including unbilled
receivables) were from Asian-based customers. Although we currently believe,
based in part on continuing discussions with these customers, that our existing
accounting reserves are adequate given the estimated exposure related to all of
our 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:
- our ability to collect our accounts receivable,
- our business,
- operating results, and
- financial condition.
30
<PAGE> 31
Our international business involves a number of risks, including:
- the impact of possible recessionary environments in foreign economies,
- political and economic instability,
- exchange rate fluctuations,
- longer receivable collection periods, and
- greater difficulty in accounts receivable collection from customers,
- difficulty in managing distributors or sales representatives,
- unexpected changes in regulatory requirements,
- reduced or limited protection for intellectual property rights,
- export license requirements,
- tariffs and other trade barriers, and
- potentially adverse tax consequences.
Although we price our products and services mainly in United States dollars,
currency exchange fluctuations could have a material adverse effect on our
business to the extent that our pricing is not competitive with products priced
in local currencies. Significant operations of Aspec, in the future, will be
conducted in foreign currencies, primarily Japanese yen. Unexpected changes in
the exchange rates for the foreign currencies could result in significant
fluctuations in the foreign currency translation gains and losses in future
periods. We do not currently hedge against foreign currency fluctuations.
We Depend Upon the Semiconductor and Electronics Industries. We are
dependent upon the semiconductor and electronics industries. Each of these
industries is characterized by:
- rapid technological change,
- short product life cycles,
- fluctuations in manufacturing capacity and
- pricing and gross margin pressures.
Each of these industries is highly cyclical and has periodically experienced
significant downturns, often in connection with or in anticipation of decline in
general economic conditions during which the number of new IC design projects
often decreases. Revenue from new licenses of our products is influenced by the
level of design efforts by our customers, and factors negatively affecting any
of these industries could have a material adverse effect on our business,
operating results and financial condition. In this regard, the shift in industry
practice from payment of up-front license fees to a royalty based model will
have a material adverse impact on our revenue in future periods. Our business,
operating results and financial condition may also fluctuate in the future from
period to period as a consequence of general economic conditions in the
semiconductor or electronics industry.
Our Products Have Potential for Product Defects. Complex products such as
those offered by us may contain undetected errors, defects or "bugs." There can
be no assurance that, despite significant testing by us and by current and
potential customers, errors will not be found in products or enhancements to
existing products after commencement of commercial shipments. We do not
presently maintain insurance with respect to potential damages due to errors or
defects in its products. Although we have not experienced material adverse
effects resulting from any such errors or defects to date, there can be no
assurance that errors or defects will not be discovered in the future,
potentially causing delays in product introduction and shipments or requiring
design modifications that could materially adversely affect our business,
operating results and financial condition.
31
<PAGE> 32
We Depend on Key Personnel. Our business depends in significant part on the
continued service of our executive officers and other senior management and key
employees, including certain technical, managerial and marketing personnel. The
loss of the services of any of these individuals or groups of individuals could
have a material adverse effect on our business, operating results and financial
condition. None of our executive officers have an employment agreement with us.
We believe that our future business results will also depend in significant part
upon our ability to identify, attract, motivate and retain additional highly
skilled technical, managerial and marketing personnel. Competition for such
personnel in the computer software industry is intense. We have currently
engaged in a search for several additional engineering personnel. There can be
no assurance we will be successful in identifying, attracting and retaining such
personnel, and the failure to do so could have a material adverse effect on our
business, operating results and financial condition.
Year 2000 Compliance is still a Risk
During 1999, we completed the process of preparing for the Year 2000 date
change. This process involved assessing, testing and remediation of all
significant information technology ("IT") and non-IT systems, identifying and
communicating with customers, suppliers and other critical service providers to
determine if entities with which we transact business had an effective plan in
place to address the Year 2000 issue, and determining the extent of our
vulnerability to the failure of third parties to remediate their own Year 2000
issue.
To date, we have not experienced any significant business disruptions as a
result of the Year 2000 issue. In addition, we have not been informed of any
such problems experienced by its our customers, suppliers and other critical
service providers. Although considered unlikely, it is too soon to conclude that
there will not be any problems arising from the Year 2000 issue, particularly at
some of our customers, suppliers and other critical service providers. We will
continue to monitor all business processes throughout 2000 to address any issues
and ensure all processes continue to function properly. Contingency plans to
address potential risks in the event of Year 2000 failures will be developed as
needed.
As of December 31, 1999, the cost of the Year 2000 project totaled
$146,000. We do not expect to incur significant costs during 2000 related to
ongoing monitoring and support activities for the Year 2000 issue.
Our Share Price is Volatile. Since our initial public offering in April
1998, the market price of our Common Stock has been highly volatile and is
expected to be significantly affected by factors such as:
- actual or anticipated fluctuations in our operating results,
- our failure to meet or exceed published earnings estimates,
- changes in earnings estimates or recommendations by securities analysts,
- announcements of technological innovations,
- new products or new contracts by us or our existing or potential
competitors,
- developments with respect to patents, copyrights or proprietary rights,
- conditions and trends in the EDA, semiconductor or electronics
industries,
- adoption of new accounting standards affecting the software industry,
- general market conditions and
- other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies which have often been unrelated to
the operating performance of such companies. These broad market fluctuations may
materially adversely affect the market price of the Common Stock. In June 1998,
securities class action litigation was filed against us and certain of our
executive officers and directors. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect upon our business, operating results and financial
condition. See "Part I -- Item 3 -- Legal Proceedings."
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... 34
Financial Statements:
Consolidated Balance Sheets
As of November 30, 1999, and November 30, 1998............ 35
Consolidated Statements of Operations
For Fiscal Years Ended November 30, 1999, November 30,
1998 and November 30, 1997................................ 36
Consolidated Statements of Stockholders' Equity (Deficiency)
For Fiscal Years Ended November 30, 1999, November 30,
1998 and November 30, 1997................................ 37
Consolidated Statements of Cash Flows
For Fiscal Years Ended November 30, 1999, November 30,
1998 and November 30, 1997................................ 38
Notes to Financial Statements............................... 39
Financial Statement Schedules -- Schedule II -- Valuation
and Qualifying Accounts and Revenues
For Fiscal Years Ended November 30, 1999, November 30,
1998 and November 30, 1997................................ 57
</TABLE>
33
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Aspec Technology, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Aspec Technology, Inc., and its subsidiaries at November 30, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended November 30, 1999 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule 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 auditing standards generally accepted in the
United States, 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
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 of the
financial statements, the Company has incurred significant losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 24, 2000
34
<PAGE> 35
ASPEC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 23,884 $ 42,480
Accounts receivable
(net of allowances of $1,229 in 1999 and $1,271 in
1998)
Billed................................................. 2,367 5,165
Unbilled............................................... 32 2,231
Income taxes receivable................................... 2,100 679
Prepaid expenses.......................................... 665 882
Inventory................................................. 92 167
Deferred income taxes -- net.............................. -- 2,100
-------- --------
Total current assets.............................. 29,140 53,704
Property and equipment -- net............................... 6,451 12,297
Goodwill and other intangible assets........................ 6,914 3,226
Loan to related party....................................... 430 --
Investments and other assets................................ 2,824 1,236
-------- --------
Total Assets...................................... $ 45,759 $ 70,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................... $ 2,676 $ 3,326
Accrued liabilities....................................... 2,960 3,104
Bank loan................................................. 222 --
Customer advances......................................... 3,636 4,206
-------- --------
Total current liabilities......................... 9,494 10,636
Other liabilities -- long term.............................. 324 1,052
-------- --------
Total liabilities................................. 9,818 11,688
-------- --------
Commitments and contingencies (Notes 9, 10 and 17)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 authorized; none
outstanding............................................ -- --
Common stock, $.001 par value; 75,000 shares authorized;
shares outstanding:
1999 -- 34,300; 1998 -- 28,399......................... 91,551 86,198
Treasury stock; 1999 -- 2,135 shares...................... (1,987) --
Stockholders notes receivable............................. (156) (184)
Deferred stock compensation............................... -- (70)
Retained deficit.......................................... (53,467) (27,169)
-------- --------
Total stockholders' equity........................ 35,941 58,775
-------- --------
Total Liabilities and Stockholders' Equity........ $ 45,759 $ 70,463
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenue..................................................... $ 7,463 $ 23,090 $20,278
Cost of revenue............................................. 13,379 16,688 8,763
-------- -------- -------
Gross (loss) profit......................................... (5,916) 6,402 11,515
-------- -------- -------
Operating expenses:
Research and development.................................. 5,564 2,640 1,190
Sales and marketing....................................... 3,724 5,952 6,537
General and administrative................................ 6,112 4,576 2,363
Write-off of purchased technology......................... 3,097 700 --
Amortization -- Goodwill and other intangible assets...... 1,081 418 --
Write down of software.................................... 1,799 -- --
-------- -------- -------
Total operating expenses.......................... 21,377 14,286 10,090
-------- -------- -------
(Loss) income from operations............................... (27,293) (7,884) 1,425
Interest and other income, net.............................. 1,610 1,614 173
Equity losses from joint venture............................ (574) -- --
-------- -------- -------
Net (loss) income before income taxes....................... (26,257) (6,270) 1,598
Provision for income taxes.................................. 41 264 639
-------- -------- -------
Net (loss) income........................................... (26,298) (6,534) 959
Accretion of redeemable preferred stock..................... -- 4,328 823
-------- -------- -------
Net (loss) income attributable to common stockholders....... $(26,298) $(10,862) $ 136
======== ======== =======
Basic (loss) earnings per share............................. $ (0.91) $ (0.43) $ 0.01
======== ======== =======
Basic average shares outstanding............................ 28,831 25,258 21,365
======== ======== =======
Diluted (loss) earnings per share........................... $ (0.91) $ (0.43) $ 0.01
======== ======== =======
Diluted average shares outstanding.......................... 28,831 25,258 22,585
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK TREASURY STOCK STOCKHOLDER DEFERRED STOCKHOLDERS'
---------------- ----------------- NOTES STOCK RETAINED (DEFICIENCY)
SHARES AMOUNT SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT EQUITY
------ ------- ------- ------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Issuance of common stock under
stock option plans, net of
repurchases................... (14) 277 -- -- 16 17 -- 310
Accretion of redeemable
preferred stock............... -- -- -- -- -- -- (212) (212)
Collection of stockholders notes
receivable.................... -- -- -- -- 101 -- -- 101
Amortization of deferred stock
compensation.................. -- -- -- -- -- 78 -- 78
Conversion of redeemable common
stock......................... 4,779 7,116 -- -- -- -- -- 7,116
Issuance of common stock, net of
issuance costs................ 6,000 71,891 -- -- -- -- -- 71,891
Purchase of SIS
Microelectronics.............. 400 4,000 -- -- -- -- -- 4,000
Redemption of preferred stock... (4,116) (4,116)
Net loss........................ -- -- -- -- -- -- (6,534) (6,534)
------ ------- ------- ------- ----- ----- -------- --------
Balances, November 30, 1998..... 28,399 $86,198 -- $ -- $(184) $ (70) $(27,169) $ 58,775
Purchase of Verilux............. 2,127 1,893 -- -- -- -- -- 1,893
Purchase of Chip & Chip......... 2,000 1,780 -- -- -- -- -- 1,780
Purchase of Novo Systems........ 1,600 1,536 -- -- -- -- -- 1,536
Issuance of common stock under
stock purchase plans, net of
repurchases................... 174 144 -- -- -- -- -- 144
Collection of stockholders'
notes receivable.............. -- -- -- -- 28 -- -- 28
Amortization of deferred stock
compensation.................. -- -- -- -- -- 70 -- 70
Purchase of treasury stock...... -- -- (2,135) (1,987) -- -- -- (1,987)
Net loss........................ -- -- -- -- -- -- (26,298) (26,298)
------ ------- ------- ------- ----- ----- -------- --------
Balances, November 30, 1999..... 34,300 $91,551 $(2,135) $(1,987) $(156) -- $(53,467) $ 35,941
====== ======= ======= ======= ===== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
ASPEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................................... $(26,298) $ (6,534) $ 959
Adjustments to reconcile net (loss) income to net cash used
for operating activities:
Write-down of software.................................... 1,799 -- --
Write-off of purchased technology......................... 3,097 700 --
Depreciation and amortization............................. 7,119 3,980 1,570
Provision for doubtful accounts........................... 817 1,150 --
Equity loss from joint venture............................ 574 -- --
Stock compensation expense................................ 70 78 114
Changes in assets and liabilities, net of assets and
liabilities acquired:
Accounts receivable..................................... 5,051 (3,480) 945
Prepaid expenses and other assets....................... 381 (420) 52
Deferred Income taxes................................... 2,100 842 (2,226)
Inventory............................................... 82 (68) --
Other assets............................................ 115 -- --
Accounts payable........................................ (1,379) 2,306 (140)
Accrued liabilities..................................... (767) 76 442
Net income tax asset/liability.......................... (1,421) (1,000) (1,729)
Other long term liabilities............................. (728) -- --
Customer advances....................................... (768) 227 (721)
-------- -------- -------
Net cash used for operating activities................ (10,156) (2,143) (734)
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (1,846) (10,504) (3,197)
Acquisition of SIS Microelectronics, net of cash
acquired................................................ -- 26 --
Acquisition of Verilux, net of cash acquired.............. (830) -- --
Acquisition of Novo, net of cash acquired................. (487) -- --
Acquisition of Chip & Chip, net of cash acquired.......... (796) -- --
Investment in Slim Technology............................. (2,329) -- --
Purchase of non marketable equity securities.............. -- (916) --
-------- -------- -------
Net cash used for investing activities................ (6,288) (11,394) (3,197)
-------- -------- -------
Cash flows from financing activities:
Sale of common stock...................................... 144 72,215 10
Purchase of treasury stock................................ (1,987) -- --
Redemption of redeemable preferred stock.................. -- (18,495) --
Repayment of borrowings................................... -- (314) --
Repurchase of common stock................................ -- (14) (4)
Loan to related party..................................... (430) -- --
Collection of stockholder notes receivable................ 28 101 108
-------- -------- -------
Net cash provided by financing activities............... (2,245) 53,493 114
-------- -------- -------
Effective exchange rate changes on cash and cash
equivalents............................................... 93 -- --
Net (decrease) increase in cash and equivalents............. (18,596) 39,956 (3,817)
Cash and equivalents, beginning of period................... 42,480 2,524 6,341
-------- -------- -------
Cash and cash equivalents, end of period.................... $ 23,884 $ 42,480 $ 2,524
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes................................ $ 31 $ 549 $ 4,594
======== ======== =======
Supplemental disclosure of non-cash investing & financing
activities:
Accretion of redeemable preferred stock................... $ -- $ 4,328 $ 823
======== ======== =======
Long term payable for acquisition of equipment............ $ -- $ 1,000 $ --
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business -- Through the end of fiscal 1999, Aspec Technology, Inc. and its
consolidated subsidiaries ("Aspec" or "the Company") was a provider of merchant
semiconductor intellectual property ('SIP") solutions for high-performance,
complex IC designs, including System-on-a-chip IC's. As described in Note 6 to
the financial statements, the Company acquired three Electronic Design
Automation ("EDA") companies, during the fourth quarter of fiscal 1999.
Subsequent to year end, as described in Note 18, the Company acquired Inbox
Software Corporation, a company providing business-to-business software
solutions. As described as in Note 18, in February 2000, the Company entered
into an agreement to sell its SIP business, subject to the approval of the Aspec
Board of Directors.
Basis of Presentation -- During fiscal 1999, the Company utilized
approximately $10.1 million of cash in its operations and had cash and cash
equivalents of $23.9 million as of November 30, 1999. As described in Note 18,
the Company, subsequent to year end, acquired Inbox Software Corporation and has
utilized a further $7.6 million of cash as part of this acquisition. The Company
also made three acquisitions during the fourth quarter of fiscal 1999. All of
these acquired businesses have yet to generate significant revenues. The Company
has suffered recurring losses for the years ended November 30, 1999 and 1998
which raise substantial doubt about the ability of the Company to continue as a
going concern. Aspec's continued existence is dependent on its ability to
achieve profitable operations. Management plans to generate positive cash flows
from operations through the successful development and marketing of their
products. Also management intends to consummate the sale of its SIP business as
outlined in Note 18 to generate additional cash. Since there is no assurance
that management will complete their plans, there is substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Aspec Technology, Inc. and its wholly owned
subsidiaries, SIS Microelectronics, Inc. Aspec Technology, Inc. (Barbados), Chip
& Chip, Inc., Verilux, Inc., Novo Systems, Corp. and its subsidiary, Zycad TSS
KK (Japan). 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 and amortization is
provided using the straight-line method over the estimated useful lives,
generally three to five years.
Amortization of Goodwill and Intangibles -- Goodwill is amortized on a
straight-line basis over five years. Other intangible assets are amortized on a
straight-line basis over two or three years.
Impairment of Assets -- The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement
sets forth guidance as to when to recognize an impairment of long-lived assets,
including goodwill, and how to measure such an impairment. The methodology set
forth in SFAS No. 121 is not significantly different from the Company's prior
policy and therefore, the adoption of SFAS No. 121 did not have a significant
impact on the consolidated financial statements as far as it relates to
impairment of long-
39
<PAGE> 40
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
lived assets used in operations. SFAS No. 121 also addresses the accounting for
long-lived assets to be disposed of and requires these assets to be carried at
the lower of cost or fair market value. (See Note 4).
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.
Fair Value of Financial Instruments -- SFAS 107 "Disclosure About Fair
Value of Financial Instruments", requires certain disclosures regarding the fair
value of financial instruments. Cash and cash equivalents, accounts receivable,
bank loan, loan to related party, accounts payable and accrued liabilities are
reflected in the consolidated financial statements at cost which approximates
fair market values because of the short-term maturity of these instruments.
Concentration of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash
and cash equivalents and accounts receivable. Management believes the credit
risk associated with such instruments is minimal. An allowance for doubtful
accounts is recorded to reduce gross accounts receivable to their net realizable
value.
Revenue Recognition -- A substantial portion 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 revenues in excess
of billings are 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.
The Company adopted the provision of Statement of Position 97-2, or SOP
97-2, "Software Revenue Recognition," as amended by Statement of Position 98-4,
"Deferral of the Effective Date of Certain Provisions of SOP 97-2," effective
December 1, 1998. SOP 97-2 supersedes Statement of Position 91-1, "Software
Revenue Recognition," and delineates the accounting for software product and
maintenance revenue. Under SOP 97-2, the Company recognizes product revenue upon
shipment if a signed contract exists, the fee is fixed and determinable,
collection of the resulting receivable is probable and product returns are
reasonably estimable. In 1998 and 1997, the Company's revenue recognition policy
was significantly the same as set forth above.
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.
Research and Development Costs -- Research and development costs are
expensed as incurred. Such costs were approximately $5,564,000, $2,640,000 and
$1,190,000 in the years ended November 30, 1999, 1998 and 1997 respectively.
Inventory Valuation -- Inventories comprise goods held for resale and are
valued at cost. Cost is determined using the first-in, first-out (FIFO) method.
Income Taxes -- The Company accounts for income taxes using the liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the financial
40
<PAGE> 41
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
statement carrying amounts and the tax bases of assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Foreign Currency Translation -- The functional currency for the majority of
foreign operations is the applicable local currency. The translation from the
applicable local currency to US dollars is performed for balance sheet accounts
using current exchange rates in effect at the balance sheet date and for revenue
and expense accounts using an average exchange rate during the period. The
resulting translation adjustments are recorded as a component of other
comprehensive income. To date, such amounts have been insignificant. Gains or
losses resulting from foreign currency transactions are included in other
income.
Investments -- Investments in significant 20 to 50 percent-owned affiliates
are accounted for using the equity method of accounting, whereby the investment
is carried at cost of acquisition, plus the Company's equity in undistributed
earnings or losses since acquisition. Impairments are recognized when management
determines that the investment or equity in earnings is not realizable.
Investments in less than twenty percent owned affiliates are accounted for at
cost, less permanent impairments, (see Note 5).
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". The Company complies with
the disclosure requirements of FAS 123, "Accounting for Stock Issued to
Employees" (see Note 14).
Earnings Per Share -- Basic and diluted earnings per share are computed in
accordance with 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 (See Note 16).
Comprehensive Income -- 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. The Company has adopted SFAS No. 130, however, to date the Company
has had no significant components of other comprehensive income.
Segment Reporting -- 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.
The Company adopted SFAS No. 131 during fiscal 1999 (see Note 11). This
statement requires that a public business enterprise report financial and
descriptive information about it's reporting operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources for segments.
SFAS 131 also establishes standards for related disclosure about products
and services, geographic areas and major customers.
41
<PAGE> 42
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Reclassifications -- Certain prior year balances have been reclassified to
conform with the current year financial statement presentation. These
reclassifications have no effect on reported net (loss) income or stockholders'
equity.
Recent Pronouncements -- 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.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard
requires companies to expense the costs of start-up activities and organization
costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. The Company does not expect SOP 98-5 to impact their
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended, is effective for
fiscal years beginning after June 15, 2000. The Company is currently evaluating
the impact of SFAS No. 133.
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,
that are primarily designers and manufacturers of integrated circuits, and
generally do not require collateral. At November 30, 1999, three customers
respectively accounted for 28%, 14% and 13% of gross accounts receivable. At
November 30, 1998, one customer accounted for 31% of gross accounts receivables.
A significant proportion 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. Approximately 72% and 74% of gross accounts receivable
(including unbilled receivables) were from Asian-based customers at November 30,
1999 and 1998 respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Computer equipment and software......................... $ 18,102 $17,700
Office and other equipment.............................. 822 1,022
-------- -------
18,924 18,722
Less accumulated depreciation and amortization.......... (12,473) (6,425)
-------- -------
$ 6,451 $12,297
======== =======
</TABLE>
Depreciation and amortization expense associated with these assets was $6.0
million, $3.6 million, and $1.6 million for the fiscal years 1999, 1998, and
1997, respectively.
42
<PAGE> 43
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The Company recorded an impairment charge of $1.8 million during the fourth
quarter of fiscal 1999 for a write down of certain software assets related to
its SIP businesses (see Note 4).
4. IMPAIRMENT OF ASSETS
On February 23, 2000 the Company signed an agreement to sell to DII Group
its SIP businesses, which is subject to Board approval. See subsequent events
footnotes for more details relating to the sale (Note 18).
Pursuant to SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", the Company evaluated the
recoverability of its assets to be disposed of, including software licenses.
Based on the analysis, the total sales price for the software licenses was $6
million. The net book value of software at November 30, 1999 was $6.1 million
and, after excluding the net book value of software that will not be transferred
and the cost of transfer, the impairment was evaluated to be $1.8 million, which
was recorded as of November 30, 1999.
5. INVESTMENTS
During the first quarter of fiscal 1999 the Company purchased a 40 percent
interest in Slim Technology Co, Ltd, (Slim Tech), a Korean company, at a cost of
$2.3 million. Slim Tech performs semiconductor design services for Korea-based
customers. This investment is accounted for using the equity method. The
Company's share of the net assets of the company was $1,739,000 at November 30,
1999.
The Company also holds an investment of $840,000 in Virage Logic, Inc.,
(Virage), a privately held company. The Company's ownership interest in Virage
is less than 20% at November 30, 1999 and is accounted for under the cost
method.
6. ACQUISITIONS
SIS MICROELECTRONICS
In fiscal 1998, the Company purchased all of the capital stock of SIS
Microelectronics for 400,000 shares of Aspec stock at $10 each, for a total
value of $4,000,000. Transaction costs were $148,000.
In conjunction with the acquisition, which was accounted for as a purchase,
assets acquired and liabilities assumed were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $4,390
Liabilities assumed......................................... 942
------
Net assets acquired....................................... 3,448
------
Purchased technology, expenses............................ 700
------
Purchase price......................................... $4,148
======
</TABLE>
The balance sheet, statements of operations and cash flows were
consolidated as from April 13, 1998.
A total of $700,000 was expensed to the Statement of Operations as value
assigned to in-process research and development projects. There were two
projects in process at the date of acquisition, one of which was 62% complete
and one of which was 16% complete.
CHIP & CHIP, INC.
In fiscal 1999, the Company purchased certain of the assets and liabilities
of Chip & Chip, Inc. for 2 million shares of Aspec stock and cash of $800,000
for a total consideration of $2.6 million. Transaction costs were $25,000.
43
<PAGE> 44
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
In conjunction with the acquisition, which was accounted for as a purchase,
assets acquired and liabilities assumed were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $1,863
Liabilities assumed......................................... 292
------
Net assets acquired....................................... 1,571
Purchased technology, expenses............................ 1,034
------
Purchase price.................................... $2,605
======
</TABLE>
The balance sheet statement of operations and cash flows were consolidated
as from September 2, 1999.
A total of $1,034,000 was expensed to the Statement of Operations as value
assigned to in-process research and development projects. There were four
projects in process at the date of acquisition, two of which were 39% complete
and two of which were 13% complete.
VERILUX DESIGN TECHNOLOGY, INC.
In fiscal 1999, the Company acquired certain assets and liabilities of
Verilux Design Technology, Inc. for 2,127,400 shares of Aspec stock and cash of
$872,600 for a total consideration of $2.8 million. Transaction costs were
$25,000.
In conjunction with the acquisition, which was accounted for as a purchase,
assets acquired and liabilities assumed were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $1,431
Liabilities assumed......................................... 73
------
Net assets acquired....................................... 1,358
Purchased technology, expenses............................ 1,433
------
Purchase price.................................... $2,791
======
</TABLE>
The balance sheet statement of operations and cash flows were consolidated
as from September 2, 1999.
A total of $1,433,000 was expensed to the Statement of Operations as value
assigned to in-process research and development projects. There were four
projects in process at the date of acquisition, two of which were 51% complete
and two of which were 33% complete.
NOVO SYSTEMS CORPORATION
In fiscal 1999, the Company purchased certain of the assets and liabilities
of Novo Systems Corporation for 1.6 million shares of Aspec stock and cash of $1
million for a total consideration of $2.6 million. Transaction costs were
$50,000.
In conjunction with the acquisition, which was accounted for as a purchase,
assets acquired and liabilities assumed were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $3,551
Liabilities assumed......................................... 1,665
------
Nets assets acquired...................................... 1,886
Purchased technology, expenses............................ 700
------
Purchase price.................................... $2,586
======
</TABLE>
The balance sheet, statement of operations and cash flows were consolidated
as from October 21, 1999.
44
<PAGE> 45
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
A total of $700,000 was expensed to the Statement of Operations as value
assigned to in-process research and development projects. There was one project
in process at the date of acquisition which was 25% complete.
As a result of these four acquisitions during fiscal 1998 and 1999, the
Company has recorded goodwill and other intangible assets, consisting of (in
thousands):
<TABLE>
<CAPTION>
AS OF
NOVEMBER 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Goodwill.................................................... $4,979 $2,925
Acquired workforce.......................................... 645 95
Developed technology........................................ 498 206
Core technology............................................. 715 --
Other....................................................... 77 --
------ ------
6,914 3,226
====== ======
</TABLE>
Amounts allocated to goodwill and other intangible costs from the above
acquisitions are being amortized over two to five years from the date of
acquisition.
Pro Forma Disclosure of Significant Acquisitions (Unaudited)
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if Chip & Chip, Inc.,
Verilux Design Technology, Inc., and Novo Systems Corporation had been purchased
by Aspec as of the beginning of each period presented, after including the
impact of certain adjustments, such as increased amortization expense due to
recording intangible assets. The one time charges to expense for the fair value
of the In-Process Research and Development have been excluded from the unaudited
pro forma results since these are non-recurring charges.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT SHARE DATA
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues.................................................... $ 11,341 $ 26,929
Net Loss.................................................... $(23,151) $(11,367)
Basic and diluted net Loss per share........................ (0.69) (0.37)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented and are not intended to be a projection of future results.
7. LOAN TO RELATED PARTY
During the fourth quarter of fiscal 1999, the Company made a bridge loan to
Inbox Software, Inc., (Inbox). This loan is unsecured, bears no interest and is
repayable on demand. The Company subsequently acquired Inbox on December 3, 1999
(see Note 18).
45
<PAGE> 46
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
8. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Accrued compensation, severance and related benefits........ $1,068 $1,445
Accrued commissions to outside sales representatives........ -- 285
Other....................................................... 1,892 1,374
------ ------
$2,960 $3,104
====== ======
</TABLE>
Included in Long term liabilities is $272,000, representing an accrual for
severance pay. The severance payments are being made bi-monthly over a period
ending in fiscal 2001.
9. BANK LOANS
As part of the purchase consideration for the acquisition of Chip & Chip,
the Company assumed borrowings of $220,000 under a bank loan, plus $2,000 in
accrued interest. The loan bore interest at 9.25% and was repaid during December
1999.
10. 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 $664,000, $585,000, and $465,000 for
the years ended November 30, 1999, 1998, and 1997, respectively.
Future minimum lease commitments under operating leases as of November 30,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
------------
<S> <C>
2000.............................................. $ 671
2001.............................................. 540
2002.............................................. 21
------
Total minimum lease payments.............. $1,232
======
</TABLE>
The following lease commitments have been acquired with the purchase of
Inbox Software, Inc., on December 3, 1999 (see Note 18):
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
------------
<S> <C>
2000................................................ $181
2001................................................ 188
2002................................................ 196
Thereafter.......................................... 74
----
Total minimum lease payments................ $639
====
</TABLE>
11. SEGMENT AND GEOGRAPHIC INFORMATION
As of November 30, 1999, the Company operated in two segments, Aspec
Technology, Inc. and SIS Microelectronics, Inc. SIS is treated as a separate
segment since SIS has separate financial information and
46
<PAGE> 47
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
this is reported directly to the Chief Executive Officer. For fiscal 1999, Novo,
Verilux and Chip & Chip represent immaterial segments and are included together
in "other" in the accompanying table.
The table below presents financial information for the two reportable
segments for the two fiscal years ended November 30, 1999. For the fiscal year
ended November 30, 1997, there was only one reportable segment as SIS
Microelectronics, Inc. was acquired during the fiscal year ended November 30,
1998.
<TABLE>
<CAPTION>
SIS MICROSYSTEMS,
INC. ASPEC OTHER CORPORATE TOTAL
----------------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C>
1999
Revenues........................... 2,513 4,780 170 -- 7,463
Loss before interest and tax....... (644) (15,939) (3,922) (6,788) (27,293)
Depreciation and amortization...... 305 6,320 494 7,119
Assets............................. 3,526 8,545 8,462 25,226 45,759
Capital expenditures on long-lived
assets........................... 185 1,661 -- -- 1,846
1998 -- -- -- --
Revenues........................... 81 23,009 -- -- 23,090
Loss before interest and tax....... (352) (794) -- (6,738) (7,884)
Depreciation and amortization...... 73 3,907 -- -- 3,980
Assets............................. 3,911 22,301 -- 44,251 70,463
Capital expenditures on long-lived
assets........................... 71 10,433 -- -- 10,504
</TABLE>
A reconciliation of earnings before interest and taxes to income before
taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------
1999 1998 1997
------- ------ -----
<S> <C> <C> <C>
(Loss) earnings before interest and taxes................ (27,293) (7,884) 1,425
Interest income.......................................... 1,560 1,622 173
Interest expense......................................... (2) (8) --
Other charges (net)...................................... (522) -- --
------- ------ -----
(Loss) earnings before income taxes............ (26,257) (6,270) 1,598
======= ====== =====
</TABLE>
Enterprise-wide information is provided in accordance with SFAS No. 131.
Revenue is by country, based on the location of the customer. All property and
equipment, except for an immaterial amount, is based in the United States and
therefore is not disclosed below. Geographic revenue for the three years ended
November 30, 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
United States............................................. 5,066 10,582 9,565
Asia...................................................... 2,188 11,557 9,812
Other International....................................... 209 951 901
----- ------ ------
Total........................................... 7,463 23,090 20,278
===== ====== ======
</TABLE>
Major Customers And International Sales -- In fiscal 1999, one customer
accounted for approximately 17% of revenue. In fiscal 1998 and 1997 one customer
accounted for 13% and 10%, respectively of revenues. Export sales to Asia
accounted for 29%, 57%, and 48% of total revenue in fiscal 1999, 1998, and 1997,
respectively.
47
<PAGE> 48
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
12. REDEEMABLE PREFERRED STOCK
During fiscal 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.
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 Company's outstanding
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 and the redeemable preferred shares were redeemed.
13. STOCKHOLDERS' EQUITY (DEFICIENCY)
Treasury Stock -- In the second quarter of 1999, the Company began
acquiring shares of its common stock in connection with a stock repurchase
program that authorizes it to repurchase up to $2 million of common shares from
time to time on the open market or pursuant to negotiated transactions at price
levels the Company deems attractive. The Company purchased 2,135 million shares
of common stock in 1999 at an aggregate cost of $1.987 million. The purpose of
the stock repurchase program is to help the Company achieve their long-term goal
of enhancing stockholder value.
When the treasury shares are reissued, any excess of the average
acquisition cost of the shares over the proceeds from reissuance will be charged
to retained earnings.
14. EMPLOYEE STOCK AND OTHER BENEFIT PLANS
Employee Stock Plans
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 stock options. At the 1999 Annual
Stockholders Meeting, the stockholders approved an increase of the shares
reserved for issuance under the 1996 Plan to 6,500,000. 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 Company's 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.
48
<PAGE> 49
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
A summary of activity under the 1996 Plan and the Director Plan between
December 1, 1996 and November 30, 1999, is as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER EXERCISE AGGREGATE AVERAGE
FOR GRANT OF SHARES PRICE PRICE EXERCISE PRICE
--------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Balances November 30, 1996............. 3,951 541 $2.20 - $ 4.25 2,130 $3.94
Options reserved under the Director
Plan................................. 250 -- -- -- --
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............. 3,291 1,449 $2.20 - $ 8.50 9,836 $6.79
Options granted...................... (5,758) 5,758 $2.06 - $13.37 42,487 $7.38
Options canceled..................... 4,291 (4,291) $2.20 - $13.37 (34,986) $8.15
Options exercised.................... -- (73) $2.20 - $ 8.00 (314) $4.38
------ ------ --------
Balances November 30, 1998............. 1,824 2,843 $2.06 - $11.00 17,023 $6.03
Options reserved under the 1996 Plan... 2,000 -- -- -- --
Options granted...................... (5,700) 5,700 $0.69 - $ 2.00 6,808 $1.19
Options canceled..................... 3,685 (3,685) $0.75 - $11.00 (17,993) $4.86
Options exercised.................... -- -- -- --
------ ------ --------
Balances November 30, 1999............. 1,809 4,858 $0.69 - $ 8.50 $ 5,838 $1.22
====== ====== ========
</TABLE>
At November 30, 1999, approximately 1,559,000 shares were available for
future grant under the 1996 Plan. At November 30, 1999, 250,000 shares were
available for future grant under the 1997 Director Option Plan.
The weighted average fair value of rights or options granted in fiscal
1997, 1998, and 1999 was $2.11, $5.26 and $1.19, respectively. 144,339, 353,290,
and 207,961 options were exercisable at November 30, 1997, 1998 and 1999
respectively.
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,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
-------------------------------------------- ----------------------------
WEIGHTED AVE.
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVE. NUMBER WEIGHTED AVE.
EXERCISE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.69 - $1.00 3,672,000 9.7 $0.89 93,719 $0.91
$1.25 - $1.40 110,000 9.1 1.35 -- --
$2.00 - $2.13 995,354 9.0 2.00 73,367 2.00
$4.25 - $6.38 40,750 7.2 4.87 23,375 4.64
$6.80 - $8.50 39,500 7.5 7.83 17,500 7.81
--------- --- ----- ------- -----
4,857,604 9.5 $1.22 207,961 $2.29
========= === ===== ======= =====
</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
49
<PAGE> 50
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
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; 100% stock volatility; risk free
interest rate, approximately 6.1% in 1997, and 6.0% in 1998 and 4.47% - 5.88% in
1999; and no dividend payments during the expected term. Forfeitures are
recognized as they occur. If the computed fair values of the 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 a loss of $819,000 (or ($0.04) per share) in 1997, a loss of
$13.1 million (or ($0.52) per share) in 1998, and a loss of $27.1 million or
($0.94) per share in 1999.
Employee Stock Purchase Plan -- In April 1998, the Company adopted the 1997
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 500,000 shares
of common stock for issuance under the Purchase Plan plus annual increases equal
to the lesser of
- the shares underlying options granted in the immediately preceding year
or
- 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.
The Purchase Plan authorizes the granting of stock purchase rights to
eligible employees during two-year offering periods with exercise dates once a
year in the first year and approximately every six months thereafter. The first
offering period commenced in April 1998 and ended on March 31, 1999, and the
second offering period commenced in April 1999 and ended on September 30, 1999.
Shares are purchased through employee payroll deductions at purchase prices
equal to 85% of the lesser of the fair market value of the Common Stock at
either the first day of each offering period or the date of purchase. As of
November 30, 1999, 174,968 shares had been issued under the Purchase Plan at an
average price of $0.82 per share.
The estimated fair value of purchase rights under the Company's Purchase
Plan is determined using the Black-Scholes pricing model with the following
assumptions for the year ended November 30, 1999; risk-free interest
rate -- 5.5%, expected average life -- 0.9 years, expected volatility -- 100%
and no expected dividends. The weighted average per share fair value of purchase
rights under the Purchase Plan during fiscal 1999 was $0.825.
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.
50
<PAGE> 51
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES
The provision for income taxes for the years ended November 30 consists of
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(Loss) income before income taxes..................... (26,257) (6,270) 1,598
======= ======= =======
Current:
Federal............................................. $(2,100) $ (632) $ 1,884
State............................................... 4 -- 401
Foreign............................................. 37 266 580
------- ------- -------
Total current............................... (2,059) (366) 2,865
------- ------- -------
Deferred:
Federal............................................. 1,790 583 (1,894)
State............................................... 310 47 (332)
------- ------- -------
Total deferred.............................. 2,100 630 (2,226)
------- ------- -------
Total provision for income taxes............ $ 41 $ 264 $ 639
======= ======= =======
</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>
1999 1998 1997
------- ------- ----
<S> <C> <C> <C>
Income tax (benefit) expense............................. $(8,927) $(2,119) $543
In Process R&D........................................... 1,404 -- --
State income taxes, net of federal benefit............... 4 (367) 81
Increase in valuation allowance.......................... 7,328 2,601 --
Other.................................................... 232 149 15
------- ------- ----
Total provision for income taxes............... $ 41 $ 264 $639
======= ======= ====
</TABLE>
The deferred tax assets valuation allowance at November 30, 1999 is
attributed to U.S. federal and state deferred tax assets, which result primarily
from the tax effect of future reversing temporary differences. Management
believes that the realization of deferred tax assets was not assured at November
30, 1999. Significant components of the Company's deferred tax assets were as
follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss................................... $ 5,525 $ 1,075 $ --
Expenses not currently deductible.................... 2,530 3,026 2,730
Depreciation and amortization........................ 43 191 --
Tax credit carryforwards............................. 1,831 409 --
------- ------- ------
Deferred tax assets.................................. 9,929 4,701 2,730
Less: valuation allowance............................ (9,929) (2,601) --
------- ------- ------
Net deferred tax assets................................ $ -- $ 2,100 $2,730
======= ======= ======
</TABLE>
51
<PAGE> 52
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
16. (LOSS) EARNINGS PER SHARE
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted (loss)
earnings per share is provided as follows (in thousands, except per share
amounts). For the purposes of the (loss) earnings per share compilation, net
loss has been reduced by the amount of the periodic accretion for redeemable
preferred stock in fiscal 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Numerator -- Basic and diluted (loss) earnings per share
Net (loss) income attributable to common stockholders..... $(26,298) $(10,862) $ 136
======== ======== =======
Denominator -- Basic (loss) earnings per share
Weighted average Common stock outstanding................. 28,831 25,258 21,365
======== ======== =======
Basic (loss) earnings per share............................. $ (0.91) $ (0.43) $ 0.01
======== ======== =======
Denominator -- Diluted (loss) earnings per share
Weighted average Denominator -- Basic (loss) earnings per
share.................................................. 28,831 25,258 21,365
Effect of dilutive securities:
Common shares subject to repurchase rights............. -- -- 978
Stock purchase rights and options...................... -- -- 242
-------- -------- -------
$ 28,831 $ 25,258 $22,585
======== ======== =======
Diluted (loss) earnings per share........................... $ (0.91) $ (0.43) $ 0.01
======== ======== =======
</TABLE>
Stock options to purchase 4,864,000 shares of common stock, at prices
ranging from $0.75 to $8.00 per share were outstanding at November 30, 1999, but
were not included in the computation of diluted earnings per share because they
were antidilutive. 243,000 common shares subject to repurchase rights were
similarly excluded. At November 30, 1998, 2,893,000 shares of common stock (at
prices ranging from $2.06 to $11.00 per share) were outstanding, but were not
included as they were anti-dilutive. 423,000 common shares subject to repurchase
rights were similarly excluded because they were anti-dilutive.
17. LEGAL PROCEEDINGS
SUPERIOR COURT FOR THE STATE OF CALIFORNIA
CLASS ACTION LAWSUITS
On July 1, 1998, a class action lawsuit, Howard Jonas, et al. v. Aspec
Technology, Inc., et al., No. CV-775037 ("the Jonas Complaint"), was filed in
the Superior Court for the State of California, County of Santa Clara. The Jonas
Complaint alleged that Aspec and certain of its officers, directors and the
underwriters of the Company's initial public offering, violated California
Corporations Code Sections 25400 and 25500, and California Business and
Professions Code Sections 17200 and 17500 by making false and misleading
statements about Aspec's financial condition. The action was purportedly brought
on behalf of all persons who purchased Aspec stock during the period from April
28, 1998 through June 25, 1998. On July 2, 1998, July 27, 1998, and August 17,
1998, three additional complaints were filed in state court against Aspec and
certain of its officers, directors, entitled respectively, William Neuman, et
al. v. Aspec Technology, Inc., et al., No. CV-775089 ("the Neuman Complaint");
Martin L. Klotz, on behalf of the Martin Klotz Defined Benefit Profit Sharing
Plan, et al. v. Aspec Technology, Inc., et al., No. CV-775591 ("the Klotz
Complaint"); Glen O. Ressler and Thelma M. Ressler, et al., v. Aspec Technology,
Inc., et al. No. CV-776065 ("the Ressler Complaint"). In addition to alleging
the same violations of the Corporations Code as the three other complaints, the
Klotz Complaint also alleged violations of Sections 11, 12, and 15 of the
Securities Act of 1933, and a class period of April 28, 1998 through June 30,
1998. The complaints sought unspecified damages.
52
<PAGE> 53
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
On January 29, 1999, the plaintiffs consolidated the pending class action
cases and filed a Consolidated Amended Complaint, styled Howard Jonas, et al. v.
Aspec Technology, Inc., et al., No. CV-775037. The Consolidated Amended
Complaint, purportedly brought on behalf of all persons who purchased Aspec's
stock between April 27, 1998 and June 30, 1998, alleges that Aspec and certain
of its officers and directors, as well as its underwriters, violated Sections
25400 and 25500 of the California Corporations Code, and Sections 11 and 15 of
the Securities Act of 1933 (except as to the underwriters). On June 7, 1999,
Aspec and certain of the individual defendants filed demurrers to the
Consolidated Complaint. On June 9, 1999, the plaintiffs filed a motion for
summary adjudication of their claims against Aspec under Section 11 of the
Securities Act. The plaintiffs also moved to certify a plaintiff class.
On August 26, 1999, the court heard argument on the defendants' demurrers.
The court sustained the demurrers in part and overruled them in part.
Specifically, the court held that the plaintiffs had not pleaded their claims
under California Corporations Code Section 25400 with sufficient particularity
and granted plaintiffs leave to amend this claim. The court overruled the
defendants' demurrers to the Section 11 claim. Following that hearing,
plaintiffs withdrew their motion for summary adjudication. Thereafter,
plaintiffs filed their First Amended Class Action Complaint, under seal, on
October 18, 1999.
On January 11, 2000, the defendants filed demurrers to Count I of the First
Amended Complaint which alleged claims under California Corporations Code
Sections 25400/25500. The Aspec Defendants demurred to Count I on the basis that
plaintiffs had not pleaded facts demonstrating that the defendants had acted
with scienter. The Aspec Defendants also moved to strike certain allegations in
the complaint. Plaintiffs filed their oppositions to these motions on February
1, 2000; the defendants' reply memoranda was filed on February 15, 2000. A
hearing on defendants' demurrers and plaintiffs' motion for class certification
is scheduled for February 24, 2000.
DERIVATIVE LAWSUIT
Certain of the Company's current and former officers, directors and
shareholder entities were also named as defendants in a derivative lawsuit
styled Linda Willinger, IRA, et al. v. Conrad Dell'Oca et al., No. CV-778007,
filed on November 12, 1998, in the Superior Court of Santa Clara County. The
derivative action alleges facts similar to those in the class action and also
alleges that certain of the directors caused the Company to conduct the initial
public offering in order to redeem certain preferred stock. Aspec filed a
demurrer to that Complaint on June 8, 1999 on behalf of certain of the officer
and director defendants and nominal defendant, Aspec. Thereafter, the plaintiffs
requested the defendants' assent to the dismissal of their complaint and the
filing of an amended complaint. Plaintiffs filed their First Amended
Shareholders' Derivative Complaint on September 2, 1999.
The Aspec Defendants demurred to that complaint on November 12, 1999, on
the basis that the nominal plaintiffs had failed to make a demand on the Board
of Directors before filing the derivative lawsuit, and that they had also failed
to plead sufficient facts to excuse a pre-suit demand. After the matter was
fully briefed, the court heard argument on January 25, 2000. On January 27,
2000, the court sustained the defendants' demurrers with sixty days' leave to
amend. Therefore, plaintiffs' amended complaint presently is due to be filed on
March 28, 2000.
OTHER LITIGATION
On June 21, 1999, a lawsuit entitled Cadabra Design Technology, Inc. v.
Aspec Technology, Inc., No. CV-782691, was filed in the Superior Court, County
of Santa Clara. Plaintiff's complaint seeks damages in the amount of $1,594,000
for an alleged breach of a commercial software licensing agreement entered into
by Cadabra Design Technology, Inc. and the Company on or about August 18, 1998.
On August 6, 1999, the Company answered the complaint -- denying liability and
asserting various affirmative defenses -- and filed a cross-complaint seeking
damages according to proof and equitable relief for breach of contract,
conversion,
53
<PAGE> 54
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
and negligent misrepresentation on the part of Cadabra Design Technology. On
February 16, 2000, the parties executed a Settlement Agreement and General
Release in the case, pursuant to which the company shall pay Cadabra $600,000 in
full and final satisfaction of all claims related to the parties' software
licensing agreement. On February 22, 2000, Cadabra filed with the court a Notice
of Settlement and Conditional Dismissal, and has agreed and represented to the
court that it will file a request for dismissal within five days after receiving
the aforementioned settlement payment. This settlement has been accrued for as
of November 30, 1999.
Aspec Technology, Inc. v. Compaq Computers, Inc. was filed on December 28,
1998 in the Superior Court of California, Santa Clara County, No. CV778943. By
the Company's complaint, they sought to collect the principal sum of $403,344,
plus interest, attorney's fees and costs, from Compaq, alleging that Compaq had
breached a contract to purchase certain of Aspec's library software. Compaq
filed a counter claim alleging that the Company had breached the contract by
failing to deliver in functional form the promised software on the schedule
promised, as well as alleging fraudulent misrepresentation relating to the
contract. The counter claim alleges unspecified damages in excess of $25,000.
Documents have been exchanged and certain written discovery has been undertaken,
but no testimony has been taken in the case. Compaq has offered to settle the
matter by paying Aspec $175,000. Aspec has not accepted the offer and is
continuing to discuss resolution with Compaq. Trial is scheduled for April 24,
2000.
On September 23, 1999, a lawsuit entitled Lesley Nemeth v. Aspec Technology
Inc., was filed in Superior Court, County of Santa Clara No. DC 383204.
Plaintiff is a former consultant to Aspec who seeks in her complaint, damages in
the sum of $12,600 plus interest and attorney's fees. On November 23, 1999 the
court ordered the matter to binding arbitration administered by the American
Arbitration Association. The Company is awaiting plaintiff's filing of the
arbitration claim.
NASDAQ INQUIRY
On September 4, 1998, the Company received an informal request for
information from the NASDAQ Listing Investigations Staff. NASDAQ requested
information concerning the Company's financial accounting and internal controls.
The Company has provided information in response to the informal inquiry. NASD
held a de-listing inquiry on December 17, 1998 at which the Company appeared
through counsel and provided information. As of February 25, 1999, the NASD
determined that the Company would remain listed on the NASDAQ.
SEC INQUIRY
In January 1999, the Company received an informal inquiry from the
Securities and Exchange Commission ("SEC") Staff which the Company believes
relates to the restatement of the Company's financial statements in 1998. The
Company continues to provide information in response to the SEC requests.
Certain provisions of the Company's Certificate of Incorporation and
indemnification agreements between the Company and its officers require the
Company to advance to such officers ongoing legal expenses of defending the
above lawsuits and may require the Company to indemnify them against judgments
rendered on certain claims. The Company expects to incur significant legal
expenses on its behalf and on behalf of such officers in connection with this
litigation. In addition, defending this litigation has resulted, and will likely
continue to result, in the diversion of management's attention from the day to
day operations of the business. There can be no assurance that this stockholder
litigation will be resolved in the Company's favor. An adverse result,
settlement or prolonged litigation would have a material adverse effect on the
business, financial condition or results of operations. The Company is currently
unable to estimate the range of potential loss associated with these legal
proceedings.
54
<PAGE> 55
ASPEC TECHNOLOGY, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITION OF INBOX SOFTWARE, INC.
On December 3, 1999, the Company purchased all of the capital stock of
Inbox Software, Inc. for 1,205,866 shares of Aspec stock at $3.59 each and cash
of $7.64 million. In addition, Aspec assumed 1,194,134 options at $3.43 each.
The options have an exercise price of $0.18 per share. The conversion ratio for
common stock options was 0.844 Aspec options for each Inbox option held. The
converted options maintain their original vesting schedule. Total consideration
was $16.2 million. Transaction costs were $95,000. In conjunction with the
acquisition, which was accounted for as a purchase, assets acquired and
liabilities assumed were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $17,233
Liabilities assumed......................................... 1,998
-------
Net assets acquired....................................... 15,235
Purchased technology expenses............................. 925
-------
Purchase price......................................... 16,160
=======
</TABLE>
The balance sheet, statement of operations and cash flows were consolidated
as from December 4, 1999. Aspec recorded $17 million of goodwill and other
intangible assets which are being amortized over two to five years.
A total of $925,000 was expensed to the statement of operations as value
assigned to the In Process Research and Development projects. There were two
projects in process at the date of acquisition, one of which was 55% complete
and one which was 25% complete.
SALE OF BUSINESSES
On February 24, 2000, the Company entered into an Asset Purchase Agreement
with DII Semiconductor, Inc. ("DII") whereby they will sell all of their
existing System IP business composing the cell library and design services
business located in Sunnyvale, CA and its wholly owned design services
subsidiary, SIS Microelectronics located in Longmont, CO.
Under the terms of the Agreement, the sale will comprise three separate
phases:
(1) On February 24, 2000 the first closing took place where certain
fixed assets and rights to Aspec Intellectual Property were sold to DII for
a total consideration of $2 million. At the same time a Transitional
Services Agreement was entered into whereby the Company agreed to contract
the employees of the System IP business to DII through the second closing
date, for the purpose of evaluating and updating the intellectual property
that is to be sold to DII as part of the second closing.
(2) On April 2000 the second closing will occur and the employees of
the System IP business will then transfer to the employment of DII. At this
time a further $3.5 million will be payable by DII under this Agreement.
(3) The third closing will be at a date mutually selected by both
parties but in no event will be later than June 1, 2000. At this time the
remaining fixed assets, comprising essentially software, will be sold to
DII for a total consideration of $6 million payable in six equal
installments on or before the 30th day of the first month of the six fiscal
quarter beginning with the quarter after the third closing date.
Either party may terminate the Agreement if the conditions to the
obligations as set forth within the Agreement have not been satisfied by June 1,
2000.
The Asset Purchase Agreement must be ratified by the Aspec Board of
Directors to be effective. The next such meeting is scheduled for March 2000.
55
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on April 24, 2000, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" 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 entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
56
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report.
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Aspec Technology, Inc.
are contained in Part II, Item 8 of this Report on Form 10-K:
Report of Independent Accountants
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity (Deficiency)
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts and Reserves
-- Allowance for Doubtful Accounts
-- Valuation Allowance for Deferred Tax Assets
All other schedules for which provision is made in the Applicable
Accounting Regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
ASPEC TECHNOLOGY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
November 30, 1997................................. 300 -- -- 300
November 30, 1998................................. 300 1,150 (179) 1,271
November 30, 1999................................. 1,271 817 (859) 1,229
Valuation Allowance for Deferred Tax Assets
November 30, 1997................................. -- -- -- --
November 30, 1998................................. -- 2,601 -- 2,601
November 30, 1999................................. 2,601 7,308 -- 9,909
</TABLE>
57
<PAGE> 58
3. REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended November 30, 1999.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
3.1(1) Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant.
4.2(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1996 Stock Plan, as amended, and form of Stock Option
Agreement.
10.3(1)* 1997 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.4(1)* 1997 Director Stock Option Plan and form of Director Option
Agreement.
10.5 Agreement and Plan of Reorganization dated as of July 29,
1999 among the Registrant, Merger Sub, Verilux Design
Corporation and certain shareholders of Verilux Design.
10.6 Agreement and Plan of Reorganization dated as of July 30,
1999 among the Registrant, Merger Sub, Chip & Chip, Inc.,
and certain shareholders of Chip & Chip, Inc.
10.7 Agreement and Plan of Reorganization dated as of October 20,
1999 among the Registrant, Merger Sub, Novo Systems
Corporation, and certain shareholders of Novo Systems
Corporation.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 54).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Report on Form 10-K pursuant to form 14(c) of this
report.
(1) Incorporated by reference to an exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (File No. 333-22913) which
became effective with the Securities and Exchange Commission on April 27,
1998.
58
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Santa Clara, State of California, on the 2nd day of March, 2000.
ASPEC TECHNOLOGY, INC.
By: /s/ RAYMOND GRAMMER
------------------------------------
Raymond Grammer
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Raymond Grammer, and each of them
acting individually, as his or her attorney-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below on March 2, 2000 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ MICHAEL J. CARROLL President and Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
(Michael J. Carroll)
/s/ RAYMOND GRAMMER Chief Financial Officer (Principal Financial
- --------------------------------------------- and Accounting Officer)
(Raymond Grammer)
/s/ CONRAD J. DELL'OCA Chairman of the Board and Director
- ---------------------------------------------
(Conrad J. Dell'Oca)
/s/ RONALD K. BELL Director
- ---------------------------------------------
(Ronald K. Bell)
/s/ DAVID K. LAM Director
- ---------------------------------------------
(David K. Lam)
</TABLE>
59
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
3.1(1) Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant.
4.2(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1996 Stock Plan, as amended, and form of Stock Option
Agreement.
10.3(1)* 1997 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.4(1)* 1997 Director Stock Option Plan and form of Director Option
Agreement.
10.5 Agreement and Plan of Reorganization dated as of July 29,
1999 among the Registrant, Merger Sub, Verilux Design
Corporation and certain shareholders of Verilux Design.
10.6 Agreement and Plan of Reorganization dated as of July 30,
1999 among the Registrant, Merger Sub, Chip & Chip, Inc.,
and certain shareholders of Chip & Chip, Inc.
10.7 Agreement and Plan of Reorganization dated as of October 20,
1999 among the Registrant, Merger Sub, Novo Systems
Corporation, and certain shareholders of Novo Systems
Corporation.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 54).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Report on Form 10-K pursuant to form 14(c) of this
report.
(1) Incorporated by reference to an exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (File No. 333-22913) which
became effective with the Securities and Exchange Commission on April 27,
1998.
<PAGE> 1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ASPEC TECHNOLOGY, INC.,
ASPEC ACQUISITION CORPORATION,
VERILUX DESIGN TECHNOLOGY
AND CERTAIN SHAREHOLDERS OF
VERILUX DESIGN TECHNOLOGY
JULY 29, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Certain Definitions ...................................................... 1
2. The Merger ............................................................... 3
2.1 Merger; Effective Time of the Merger ............................... 3
2.2 Closing ............................................................ 3
2.3 Effect of the Merger ............................................... 3
2.4 Tax-Free Reorganization ............................................ 4
2.5 Verilux Stock Options and Convertible Securities. .................. 4
3. Effect of Merger on the Capital Stock of Verilux; Exchange of
Certificates ............................................................. 4
3.1 Exchange of Stock .................................................. 4
3.2 Fractional Shares .................................................. 5
3.3 Exchange of Certificates ........................................... 5
3.4 Taking of Necessary Action; Further Action ......................... 6
4. Securities Act Compliance ................................................ 6
4.1 Securities Act Exemption ........................................... 6
4.2 Stock Restrictions ................................................. 6
5. Representations and Warranties of Verilux and the Majority Shareholders .. 7
5.1 Organization, Qualification, and Corporate Power ................... 7
5.2 Authorization ...................................................... 7
5.3 Capitalization ..................................................... 7
5.4 Noncontravention ................................................... 8
5.5 Broker's Fees ...................................................... 8
5.6 Financial Statements ............................................... 8
5.7 Subsidiaries ....................................................... 9
5.8 Title to Assets .................................................... 9
5.9 Events Subsequent to Most Recent Fiscal Period End ................. 9
5.10 Undisclosed Liabilities ............................................ 11
5.11 Legal Compliance ................................................... 12
5.12 Tax Matters ........................................................ 12
5.13 Properties ......................................................... 13
5.14 Intellectual Property .............................................. 14
5.15 Tangible Assets .................................................... 15
5.16 Inventory .......................................................... 15
5.17 Contracts .......................................................... 15
5.18 Notes and Accounts Receivable ...................................... 17
5.19 Power of Attorney .................................................. 17
5.20 Insurance .......................................................... 17
5.21 Litigation ......................................................... 17
5.22 Product Warranty ................................................... 17
5.23 Product Liability .................................................. 18
5.24 Employees .......................................................... 18
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
5.25 Employee Benefits .................................................. 18
5.26 Guaranties ......................................................... 20
5.27 Environment, Health, and Safety .................................... 20
5.28 Certain Business Relationships With Verilux ....................... 21
5.29 No Adverse Developments ............................................ 22
5.30 Full Disclosure .................................................... 22
6. Representations and Warranties of Aspec .................................. 22
6.1 Organization, Qualification, and Corporate Power ................... 22
6.2 Authorization ...................................................... 22
6.3 Capitalization ..................................................... 23
6.4 Noncontravention ................................................... 23
6.5 Brokers' Fees ...................................................... 23
6.6 SEC Filings ........................................................ 23
6.7 Financial Statements ............................................... 24
6.8 Litigation ......................................................... 24
6.9 No Adverse Developments ............................................ 24
7. Pre-Closing Covenants .................................................... 24
7.1 General ............................................................ 24
7.2 Notices and Consents ............................................... 25
7.3 Conduct of Business ................................................ 25
7.4 Preservation of Business ........................................... 25
7.5 Access to Information .............................................. 25
7.6 Notice of Developments ............................................. 25
7.7 Exclusivity ........................................................ 26
8. Post-Closing Covenants ................................................... 27
8.1 General ............................................................ 27
8.2 Litigation Support ................................................. 27
8.3 Transition ......................................................... 27
8.4 Confidentiality .................................................... 27
8.5 Verilux Employees; Employee Stock Options .......................... 28
9. Conditions to Obligations to Close ....................................... 28
9.1 Conditions to Aspec's Obligation to Close .......................... 28
9.2 Conditions to Verilux's Obligation ................................ 29
10. Survival of Representations, Indemnification ............................. 30
10.1 Limited Survival of Representations and Warranties ................. 30
10.2 Indemnification by Aspec ........................................... 30
10.3 Indemnification by Majority Shareholders ........................... 31
10.4 Notice of Claims ................................................... 31
10.5 Third Party Claims ................................................. 32
10.6 Limitation of Claims ............................................... 32
11. Termination .............................................................. 32
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
11.1 Termination of the Agreement ....................................... 32
11.2 Effect of Termination .............................................. 33
12. Miscellaneous ............................................................ 33
12.1 Publicity .......................................................... 33
12.2 No Third-Party Beneficiaries ....................................... 33
12.3 Entire Agreement ................................................... 34
12.4 Succession and Assignment .......................................... 34
12.5 Counterparts ....................................................... 34
12.6 Headings ........................................................... 34
12.7 Notices ............................................................ 34
12.8 Governing Law; Dispute Resolution .................................. 35
12.9 Amendments and Waivers ............................................. 36
12.10 Severability ....................................................... 36
12.11 Expenses ........................................................... 36
12.12 Construction ....................................................... 36
12.13 Incorporation of Exhibits and Schedules ............................ 37
</TABLE>
EXHIBITS
Exhibit A Certificate of Merger
Exhibit B List of Verilux shareholders
Exhibit C Verilux Disclosure Schedule
Exhibit D Aspec Disclosure Schedule
Exhibit E Opinion of Counsel for Verilux and Majority Shareholders
Exhibit F Opinion of Counsel for Aspec
<PAGE> 5
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "AGREEMENT") is entered
into as of July 29, 1999, by and among Aspec Technology, Inc., a Delaware
corporation ("ASPEC"), Aspec Acquisition Corporation, a California corporation
and a wholly-owned subsidiary of Aspec ("MERGER SUB"), Verilux Design
Technology, a California corporation ("VERILUX"), and Jessup N. Lee and
Soo-Young Oh (collectively, the "MAJORITY SHAREHOLDERS"). Aspec, Merger Sub,
Verilux and the Majority Shareholders are sometimes referred to herein
individually as a "PARTY" and collectively as the "PARTIES."
RECITALS
A. Pursuant to a Certificate of Merger (together with any Articles
of Merger required by the CBCA) providing for the merger of Merger Sub with and
into Verilux pursuant to the California Business Corporation Act (the "CBCA")
and the Delaware General Corporation Law (the "DGCL"), the shares of Common
Stock of Verilux, no par value, issued and outstanding immediately prior to the
effective time of the Merger will be converted into an aggregate of 2,127,400
shares of Common Stock of Aspec and $872,600 cash, and Verilux will become a
wholly-owned subsidiary of Aspec.
B. The Parties desire to enter into this Agreement for the purpose
of setting forth certain representations, warranties and covenants made by each
to the other as an inducement to the execution and delivery of this Agreement,
and to serve as conditions precedent to the consummation of the merger of Merger
Sub with and into Verilux.
C. The respective Boards of Directors of Aspec and Verilux have
approved and adopted this Agreement, and the Agreement is intended to be a plan
of reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements, representations, warranties and covenants herein contained, the
parties hereto do hereby agree as follows:
AGREEMENT
1. Certain Definitions. As used in this Agreement, the following
terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and vice versa). Certain other terms
are defined in the text of this Agreement.
"AFFILIATE" of a Person means any other Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with such Person.
"BUSINESS CONDITION" means the business, financial condition,
results of operations and assets of such corporate entity.
<PAGE> 6
"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation, retirement plan, severance plan or similar plan or arrangement;
(b) Employee Pension Benefit Plan; (c) Employee Welfare Benefit Plan; and (d)
any other nonqualified plan providing welfare benefits, including but not
limited to medical, dental, life insurance and disability benefits.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in
ERISA Sec. 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in
ERISA Sec. 3(1).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"GROSS NEGLIGENCE" consists of an intentional act, or the
failure to perform a duty, with reckless disregard for the consequences of such
act or failure.
"INTELLECTUAL PROPERTY" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof, (b)
all trademarks, service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, drawings, specifications, customer and supplier lists,
pricing and cost information, financial information, and business and marketing
plans and proposals), (e) all computer software (including data and related
documentation), (f) all other proprietary rights, and (g) all copies and
tangible embodiments thereof (in whatever form or medium).
"LOSSES" shall mean any and all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs,
reasonable amounts paid in settlement, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including court costs and reasonable attorneys' fees
and expenses in connection with any action, suit or proceeding to the extent of
the amount of such actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, reasonable amounts paid in
settlement, liabilities, obligations, taxes, liens, losses, expenses or fees.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on the Business Condition of the corporate entity and its subsidiaries.
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Sec.
3(37) and Code Sec. 414(f).
"VERILUX SHAREHOLDERS" shall mean the shareholders of record of
Verilux immediately prior to the Effective Time of the Merger.
- 6 -
<PAGE> 7
"ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency).
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"SECURITY INTEREST" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and payable,
(c) purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
2. The Merger.
2.1 Merger; Effective Time of the Merger. Subject to the
terms and conditions of this Agreement, Merger Sub will be merged with and into
Verilux (the "MERGER") in accordance with the CBCA and the DGCL, and, as a
result, Verilux will become a wholly-owned subsidiary of Aspec. In accordance
with the provisions of this Agreement, a Certificate of Merger in the form
attached hereto as Exhibit A shall be filed with the Delaware Secretary of State
in accordance with the DGCL and such Certificate of Merger (or, to the extent
required by the CBCA, Articles of Merger in form and substance mutually
acceptable to counsel for Verilux and counsel for Aspec) shall be filed with the
California Secretary of State in accordance with the CBCA on the Closing Date
(as defined in Section 2.2) and each issued and outstanding share of Common
Stock, no par value, of Verilux ("VERILUX COMMON STOCK") shall be converted into
a fraction of a share of Common Stock, $0.001 par value, of Aspec ("ASPEC COMMON
STOCK") in the manner contemplated by Section 3. The Merger shall become
effective at the time of the filing of the Merger Agreement with the California
Secretary of State and the Delaware Secretary of State (the date of such filing
being hereinafter referred to as the "EFFECTIVE DATE OF THE MERGER" and the time
of such filing being hereinafter referred to as the "EFFECTIVE TIME OF THE
MERGER").
2.2 Closing. The closing of the Merger (the "CLOSING") will
take place as soon as practicable after satisfaction or waiver of the latest to
occur of the conditions set forth in Section 9 (the "CLOSING DATE"), at the
offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page
Mill Road, Palo Alto, California 94304-1050, or such other place as determined
by the parties.
2.3 Effect of the Merger. At the Effective Time of the
Merger, (i) the separate existence of Merger Sub shall cease and Merger Sub
shall be merged with and into Verilux (Merger Sub and Verilux are sometimes
referred to herein as the "CONSTITUENT CORPORATIONS" and Verilux after the
Merger is sometimes referred to herein as the "SURVIVING CORPORATION"), (ii) the
Articles of Incorporation of Merger Sub shall be the Certificate of
Incorporation of the Surviving Corporation, (iii) the Bylaws of Merger Sub shall
be the Bylaws of the Surviving Corporation, (iv) the directors of Merger Sub
shall be the directors of the Surviving Corporation and (v) the
- 7 -
<PAGE> 8
Merger shall, from and after the Effective Time of the Merger, have all the
effects provided by applicable law.
2.4 Tax-Free Reorganization. The Merger is intended to
qualify as a tax free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE").
2.5 Verilux Stock Options and Convertible Securities. On or
prior to the Effective Time of the Merger, all outstanding options, warrants and
convertible securities of Verilux shall terminate unless otherwise exercised
prior to such time. All current outstanding options, warrants and convertible
securities of Verilux are listed in the Verilux Disclosure schedule.
3. Effect of Merger on the Capital Stock of Verilux; Exchange of
Certificates
3.1 Exchange of Stock and Cash Consideration. As of the
Effective Time of the Merger, each share of Verilux Common Stock that is issued
and outstanding immediately prior to the Effective Time of the Merger as
provided for in Section 3.2 below), shall, by virtue of the Merger and without
any action on the part of Verilux Shareholders, be converted into (i) shares of
Aspec Common Stock, and (ii) cash payment determined by dividing 3,000,000 by
the aggregate number of shares of Verilux Common Stock (the "EXCHANGE RATIO")
issued and outstanding immediately prior to the Effective Time of the Merger
(including any shares issued upon the exercise of outstanding Verilux options or
Verilux convertible securities and any Dissenting Shares). Attached as Exhibit B
is a Verilux shareholder list showing the shares of Aspec Common Stock and cash
to be exchanged for the shares of Verilux Common Stock held by each Verilux
Shareholder.
3.2 Fractional Shares. No fractional shares of Aspec Common
Stock shall be issued in the Merger. In lieu thereof, each holder of shares of
Verilux Common Stock who would otherwise be entitled to receive a fraction of a
share of Aspec Common Stock shall receive from Aspec an amount of cash (rounded
to the nearest whole cent) equal to the product of the fraction of a share of
Aspec Common Stock to which such holder would otherwise be entitled, multiplied
by $1.00. For the purpose of determining fractional shares, all shares of Aspec
Common Stock to be issued to any Verilux shareholder shall be aggregated.
3.3 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, Aspec
shall appoint itself or ChaseMellon Shareholder Services, L.L.C. to act as the
exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) Aspec to Provide Aspec Common Stock. Promptly
after the Effective Date of the Merger, Aspec shall make available for exchange
in accordance with this Section 3, through such reasonable procedures as Aspec
may adopt, the shares of Aspec Common Stock issuable pursuant to Section 3.1 in
exchange for outstanding shares of Verilux Common Stock.
- 8 -
<PAGE> 9
(c) Exchange Procedures. Within ten (10) days after
the Effective Date of the Merger, the Exchange Agent shall mail to each holder
of record of a certificate or certificates which immediately prior to the
Effective Date of the Merger represented outstanding shares of Verilux Common
Stock (the "CERTIFICATES") whose shares are being converted into shares of Aspec
Common Stock pursuant to Section 3.1 hereof (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and which shall be in such form and have such other provisions as Aspec
may reasonably specify, including appropriate investment representations to be
made by each such shareholder) (the "LETTER OF TRANSMITTAL") and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for shares of Aspec Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Aspec, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor the
number of shares of Aspec Common Stock to which the holder of Verilux Common
Stock is entitled pursuant to Section 3.1 hereof. The Certificate so surrendered
shall forthwith be canceled. No interest will accrue or be paid to the holder of
any outstanding Verilux Common Stock. From and after the Effective Date of the
Merger, until surrendered as contemplated by this Section 3.4, each Certificate
shall be deemed for all corporate purposes to evidence the number of shares of
Aspec Common Stock into which the shares of Verilux Common Stock represented by
such Certificate have been converted. Notwithstanding the foregoing procedures,
Aspec shall use its reasonable efforts to provide the form of Letter of
Transmittal to Verilux as soon as practical after the date hereof, and Verilux
shall provide such Letter of Transmittal to each Verilux shareholder. The
parties agree that in the event Aspec makes such Letter of Transmittal available
to Verilux, any Exchange Agent shall not be obligated to mail such Letter of
Transmittal to the Verilux shareholders.
(d) No Further Ownership Rights in Capital Stock of
Verilux. The shares of Aspec Common Stock delivered upon the surrender for
exchange of shares of Verilux Common Stock in accordance with the terms hereof
shall be deemed to have been delivered in full satisfaction of all rights
pertaining to such Verilux Common Stock. There shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of Verilux
Common Stock which were outstanding immediately prior to the Effective Date of
the Merger. If, after the Effective Date of the Merger, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Section 3.3, provided that the presenting
holder is listed on Verilux's shareholder list as a holder of Verilux Common
Stock.
3.4 Taking of Necessary Action; Further Action. Aspec,
Merger Sub, Verilux and the Majority Shareholders shall take all such actions as
may be necessary or appropriate in order to effect the Merger as promptly as
possible. If, at any time after the Effective Date of the Merger, any further
action is necessary or desirable to carry out the purposes of this Agreement and
to vest the Surviving Corporation with full right, title and possession to all
assets, property, rights, privileges, powers and franchises of Verilux, the
officers and directors of the Surviving Corporation are fully authorized in the
name of the corporation or otherwise to take, and shall take, all such action.
4. Securities Act Compliance.
- 9 -
<PAGE> 10
4.1 Securities Act Exemption. The issuance of the Aspec
Common Stock in the Merger shall not be registered under the Securities Act of
1933, as amended (the "SECURITIES ACT"), in reliance upon Section 4(2) and/or
Regulation D of the Securities Act.
4.2 Stock Restrictions. The certificates representing the
shares of Aspec Common Stock issued pursuant to this Agreement shall bear a
restrictive legend (and stop transfer orders shall be placed against the
transfer thereof with Aspec's transfer agent), stating substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED,
ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT (I) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (II) IN
COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN OPINION OF
COUNSEL FOR ASPEC THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
5. Representations and Warranties of Verilux and the Majority
Shareholders. Verilux and, to their respective knowledge, each of the Majority
Shareholders severally and not jointly represents and warrants to Aspec and
Merger Sub that the statements contained in this Section 5 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 5), except as
set forth in the disclosure schedule delivered by Verilux to Aspec on the date
hereof (and initialed by Aspec), a copy of which is attached hereto as Exhibit C
(referred to herein as the "VERILUX DISCLOSURE SCHEDULE"). The Verilux
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Section 5.
5.1 Organization, Qualification, and Corporate Power.
Verilux is a corporation duly organized, validly existing, and in good standing
under the laws of the State of California. Verilux is duly authorized to conduct
business and is in good standing under the laws of each other jurisdiction where
such qualification is required. There is no state, other than California, in
which Verilux owns any property or in which it has any employees, offices or
operations. Verilux has full corporate power and authority, and has all
necessary and material licenses and permits, to carry on the businesses in which
it is engaged and to own and use the properties owned and used by it. Section 5
of the Verilux Disclosure Schedule lists the directors and officers of Verilux.
The operations now being conducted by Verilux have not been conducted under any
other name during the past five (5) years.
5.2 Authorization. Verilux has full power and authority to
execute and deliver this Agreement and the Merger Agreement, and, subject to
receipt of the requisite approval of its
- 10 -
<PAGE> 11
shareholders, to consummate the transactions contemplated hereunder and to
perform its obligations hereunder and no other proceedings on the part of
Verilux are necessary to authorize the execution, delivery and performance of
this Agreement and the Merger Agreement. This Agreement and the Merger Agreement
and the transactions contemplated thereby have been approved by the Verilux's
Board of Directors and Shareholders. This Agreement and the Merger Agreement
constitute the valid and legally binding obligations of Verilux, enforceable
against Verilux in accordance with their respective terms and conditions.
Verilux need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement.
5.3 Capitalization.
(a) Capital Stock. As of the date of this Agreement,
the entire authorized capital stock of Verilux consists of 5,000,000 shares of
Common Stock, 4,252,916 of which are issued and outstanding. In addition no
stock options are currently outstanding and all options have been exercised or
terminated. All of the issued and outstanding shares of capital stock have been
duly authorized, are validly issued, fully paid, and non-assessable, and are
held of record by the respective shareholders as set forth in Section 5.3(a) of
the Verilux Disclosure Schedule. All of the outstanding shares of capital stock
have been offered, issued and sold by Verilux in compliance with applicable
Federal and state securities laws. As of the Closing Date, the entire authorized
capital stock of Verilux shall consist of 5,000,000 shares of Common Stock,
4,252,916 of which shall be issued and outstanding. As of the Closing Date, all
of the then issued and outstanding shares of capital stock shall have been duly
authorized, shall be validly issued, fully paid, and non-assessable, and shall
be held of record by the respective shareholders as set forth in Section 5.3(a)
of the Verilux Disclosure Schedule. As of the Closing Date, all of the then
outstanding shares of capital stock shall have been offered, issued and sold by
Verilux in compliance with applicable Federal and state securities laws.
(b) No Other Rights or Agreements. As of the date of
this Agreement, Section 5.3(b) of the Verilux Disclosure Schedule lists all of
the holders of options, warrants, purchase rights, subscription rights,
conversion rights, convertible debentures or other securities, exchange rights
and other rights that could require Verilux to issue, sell or otherwise cause to
become outstanding any of its capital stock (the "STOCK RIGHTS"), and the number
of shares of Verilux Common Stock subject to such Stock Rights. Except as set
forth in Section 5.3(b) of the Verilux Disclosure Schedule, there are no other
outstanding or authorized Stock Rights. Except as set forth in Section 5.3(b) of
the Verilux Disclosure Schedule, there are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or similar rights with
respect to Verilux. Other than as contemplated by Section 7.9 hereof, there are
no voting trusts, proxies, or other agreements or understandings with respect to
the voting of the capital stock of Verilux. All of the Verilux Stock Rights will
be fully exercised or canceled prior to the Effective Time of the Merger. As of
the Effective Time of the Merger, there will be (i) no outstanding or authorized
Stock Rights, (ii) no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to Verilux and (iii)
no voting trusts, proxies, or other agreements or understandings with respect to
the voting of the capital stock of Verilux (other than as contemplated by
Section 7.9 hereof).
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5.4 Noncontravention. Neither the execution and the delivery
of this Agreement by Verilux nor the consummation by Verilux of the transactions
contemplated hereby, will (A) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any government, governmental agency, or court to which Verilux is subject or
any provision of its Articles of Incorporation or bylaws, or (B) (i) conflict
with, (ii) result in a breach of, (iii) constitute a default under, (iv) result
in the acceleration of, (v) create in any party the right to accelerate,
terminate, modify, or cancel, or (vi) except as set forth in Section 5.4 of the
Verilux Disclosure Schedule, require any notice under, any agreement, contract,
lease, license, instrument, franchise permit or other arrangement to which
Verilux is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Security Interest upon any of its
assets).
5.5 Broker's Fees. Neither Verilux nor any of the Majority
Shareholders has any liability or obligation to pay any fees or commissions to
any broker, finder or agent with respect to the transactions contemplated by
this Agreement.
5.6 Financial Statements. Section 5.6 of the Verilux
Disclosure Schedule contains the following financial statements (collectively
the "FINANCIAL STATEMENTS"): (i) unaudited balance sheets and statements of
income and cash flows as of and for the fiscal year ended December 31, 1998 (the
"MOST RECENT FISCAL YEAR END") for Verilux; and (ii) an unaudited balance sheet
and statements of income and cash flows (the "MOST RECENT FINANCIAL STATEMENTS")
as of and for the fiscal period ended March 31, 1999 and June 30, 1999 (the
"MOST RECENT FISCAL PERIOD ENDS") for Verilux. The Financial Statements
(including the notes thereto) have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods covered thereby and present fairly the financial condition of
Verilux as of such dates and the results of operations of Verilux for such
periods; provided, however, that the Most Recent Financial Statements lack
footnotes and certain other presentation items and are subject to normal year
end adjustments. Except as set forth in Section 5.6 of the Verilux Disclosure
Schedule, the books of account of Verilux reflect as of the dates shown thereon
all items of income and expenses, and all assets, liabilities and accruals of
Verilux required to be reflected therein, in accordance with generally accepted
accounting principles consistently applied.
5.7 Subsidiaries. Verilux has no subsidiaries and has not
been a subsidiary of another company.
5.8 Title to Assets. Verilux has good and marketable title
to, or a valid leasehold interest in, the properties and assets (including,
without limitation, all Intellectual Property) used by it, located on its
premises, or shown on the balance sheet contained within the Most Recent
Financial Statements (the "MOST RECENT BALANCE SHEET") or acquired after the
date thereof, free and clear of all Security Interests, except for properties
and assets disposed of in the Ordinary Course of Business since the date of the
Most Recent Balance Sheet and except as set forth in Section 5.8 of the Verilux
Disclosure Schedule. No Person other than Verilux will own at the time of the
Closing any assets or properties currently utilized in or necessary to the
operations or business of Verilux or situated on any of the premises of Verilux.
There are no existing contracts, agreements, commitments or
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arrangements with any Person to acquire any of the assets or properties of
Verilux (or any interest therein) except for this Agreement.
5.9 Events Subsequent to Most Recent Fiscal Period End.
Since the Most Recent Fiscal Period End, there has not been any material adverse
change in the Business Condition of Verilux. Without limiting the generality of
the foregoing, since that date:
(a) Verilux has not sold, leased, transferred, or
assigned any assets or properties, tangible or intangible, outside the Ordinary
Course of Business;
(b) except for those agreements, contracts, leases
and commitments identified in Section 5.17 of the Verilux Disclosure Schedule,
Verilux has not entered into, assumed or become bound under or obligated by any
agreement, contract, lease or commitment (collectively a "VERILUX AGREEMENT") or
extended or modified the terms of any Verilux Agreement which (i) involves the
payment of greater than $10,000 per annum or which extends for more than one (1)
year, (ii) involves any payment or obligation to any Affiliate of Verilux other
than in the Ordinary Course of Business, (iii) involves the sale of any material
assets, (iv) involves any OEM relationship, or (v) involves any license of
Verilux's technology;
(c) to the knowledge of Verilux, no party (including
Verilux) has accelerated, terminated, made modifications to, or canceled any
agreement, contract, lease, or license to which Verilux is a party or by which
it is bound and Verilux has not modified, canceled or waived or settled any
debts or claims held by it, outside the Ordinary Course of Business, or waived
or settled any rights or claims of a substantial value, whether or not in the
Ordinary Course of Business;
(d) none of the assets of Verilux, tangible or
intangible, has become subject to any Security Interest, except as set forth on
Section 5.8 of the Verilux Disclosure Schedule;
(e) Verilux has not made any capital expenditures
except in the Ordinary Course of Business and not exceeding $10,000 in the
aggregate of all such capital expenditures;
(f) Verilux has not made any capital investment in,
or any loan to, any other Person;
(g) Verilux has not created, incurred, assumed,
prepaid or guaranteed any indebtedness for borrowed money and capitalized lease
obligations, or extended or modified any existing indebtedness, except as
provided in Section 9.1(i) hereof;
(h) Verilux has not granted any license or
sublicense of any rights under or with respect to any Intellectual Property;
(i) there has been no change made or authorized in
the Articles of Incorporation or bylaws of Verilux;
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<PAGE> 14
(j) Verilux has not issued, sold, or otherwise
disposed of any of its capital stock, or granted any options, warrants, or other
rights to purchase or obtain (except upon the conversion, exchange or exercise
of any such securities which are described on Section 5.3 of the Verilux
Disclosure Schedule) any of its capital stock;
(k) Verilux has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock (whether in
cash or in kind) or redeemed, purchased, or otherwise acquired any of its
capital stock (other than with respect to any Dissenting Shares (as defined
herein));
(l) Verilux has not experienced any damage,
destruction, or loss (whether or not covered by insurance) to its property in
excess of $10,000 in the aggregate of all such damage, destruction and losses;
(m) Verilux has not suffered any repeated, recurring
or prolonged shortage, cessation or interruption of inventory shipments,
supplies or utility services;
(n) Verilux has not made any loan to, or entered
into any other transaction with, or paid any bonuses in excess of an aggregate
of $10,000 to, any of its Affiliates, directors, officers, or employees or their
Affiliates, and, in any event, any such transaction was on fair and reasonable
terms no less favorable to Verilux than would be obtained in a comparable arm's
length transaction with a Person which is not such a director, officer or
employee or Affiliate thereof;
(o) Verilux has not entered into any employment
contract or collective bargaining agreement, written or oral, or modified the
terms of any existing such contract or agreement;
(p) Verilux has not granted any increase in the base
compensation of any of its directors or officers, or, except in the Ordinary
Course of Business, any of its employees;
(q) Verilux has not adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or other plan,
contract, or commitment for the benefit of any of its directors, officers, or
employees (or taken any such action with respect to any other Employee Benefit
Plan);
(r) Verilux has not made any other change in
employment terms for any of its directors or officers, and Verilux has not made
any other change in employment terms for any other employees outside the
Ordinary Course of Business;
(s) Verilux has not suffered any material adverse
change or any threat of any material adverse change in its relations with, or
any loss or threat of loss of, any of its major customers, distributors or
dealers;
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<PAGE> 15
(t) Verilux has not suffered any material adverse
change or any threat of any material adverse change in its relations with, or
any loss or threat of loss of, any of it major suppliers;
(u) Verilux has not received notice or had knowledge
of any actual or threatened labor trouble or strike, or any other occurrence,
event or condition of a similar character;
(v) Verilux has not changed any of the accounting
principles followed by it or the method of applying such principles, except as
described on Schedule 5.6 of the Verilux Disclosure Schedule;
(w) Verilux has not made a change in any of its
banking or safe deposit arrangements;
(x) Verilux has not entered into any transaction
other than in the Ordinary Course of Business; and
(y) Verilux has not committed to any of the
foregoing.
5.10 Undisclosed Liabilities. Verilux has no material
liability (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due, including any liability for
taxes) of a character which, under GAAP, should be accrued, shown or disclosed
on a balance sheet of Verilux, except for (i) liabilities set forth on the Most
Recent Balance Sheet and (ii) liabilities which have arisen after the Most
Recent Fiscal Period End in the Ordinary Course of Business.
5.11 Legal Compliance. Verilux has complied in all material
respects with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof). To
the knowledge of Verilux, no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, notice or inquiry has been filed or commenced
by or against, or received by, any governmental body alleging any failure to so
comply. Verilux has all licenses, permits, approvals, registrations,
qualifications, certificates and other governmental authorizations that are
necessary for the operations of Verilux as they are presently conducted, except
for any such licenses, permits, approvals, registrations, qualifications,
certificates and other governmental authorizations which, if not obtained, would
not individually or in the aggregate be likely to result Material Adverse Effect
on Verilux.
5.12 Tax Matters.
(a) For purposes of this Agreement, "TAXES" means
all federal, state, municipal, local or foreign income, gross receipts, windfall
profits, severance, property, production, sales, use, value added, license,
excise, franchise, employment, withholding, capital stock, levies, imposts,
duties, transfer and registration fees or similar taxes or charges imposed on
the income,
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payroll, properties or operations of Verilux, together with any interest,
additions or penalties, deficiencies or assessments with respect thereto and any
interest in respect of such additions or penalties.
(b) Verilux has filed all reports and returns with
respect to any Taxes ("TAX RETURNS") that it was required to file. All such Tax
Returns were correct and complete in all material respects, and no such Tax
Returns are currently the subject of audit. All Taxes owed by Verilux (whether
or not shown on any Tax Return) were paid in full when due or are being
contested in good faith and are supported by adequate reserves on the Most
Recent Financial Statements, except any state Taxes (other than California
related Taxes) which are not individually or in the aggregate material to
Verilux. Verilux has provided adequate reserves on its Financial Statements for
the payment of any taxes accrued but not yet due and payable. Verilux is not
currently the beneficiary of any extension of time within which to file any Tax
Return, and Verilux has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to any Tax assessment or
deficiency.
(c) There is no dispute or claim concerning any Tax
liability of Verilux either (A) claimed or raised by any authority in writing or
(B) based upon personal contact with any agent of such authority. There are no
tax liens of any kind upon any property or assets of Verilux, except for
inchoate liens for taxes not yet due and payable.
(d) Verilux has not filed a consent under Sec.
341(f) of the Internal Revenue Code of 1986, as amended (the "CODE") concerning
collapsible corporations. Verilux has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under any
circumstances could obligate it to make any payments as a result of the
consummation of the Merger that will not be deductible under Code Sec. 280G.
Verilux has not been a United States real property holding corporation within
the meaning of Code Sec. 897(c)(2) during the applicable period specified in
Code Sec. 897(c)(1)(A)(ii). Verilux is not a party to any tax allocation or
sharing agreement. Verilux (A) has not been a member of any affiliated group
within the meaning of Code Sec. 1504 or any similar group defined under a
similar provision of state, local, or foreign law (an "AFFILIATED GROUP") filing
a consolidated federal Income Tax Return and (B) has no any liability for the
taxes of any Person under Treas. Reg. Section 1.1502-6 (or any similar provision
of state, local, or foreign law), as a transferee or successor, by contract, or
otherwise.
(e) The unpaid Taxes of Verilux (A) did not, as of
the Most Recent Fiscal Period End, exceed by any amount the reserve for Tax
liability (other than any reserve for deferred taxes established to reflect
timing differences between book and tax income) set forth on the face of the
Most Recent Balance Sheet (rather than in any notes thereto) and (B) will not
exceed that reserve as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of Verilux in
filing its Tax Returns.
5.13 Properties.
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(a) Verilux does not currently own and has never
previously owned any real property.
(b) Section 5.13 of the Verilux Disclosure Schedule
lists and describes briefly all real property leased or subleased to Verilux.
Verilux has delivered to Aspec correct and complete copies of the leases and
subleases listed in Section 5.13 of the Verilux Disclosure Schedule (as amended
to date). With respect to each lease and sublease listed in Section 5.13 of the
Verilux Disclosure Schedule to the knowledge of Verilux:
(i) the lease or sublease is legal, valid,
binding, enforceable, and in full force and effect in all respects;
(ii) no party to the lease or sublease is in
breach or default, and no event has occurred which, with notice or lapse of
time, would constitute a breach or default or permit termination, modification,
or acceleration thereunder;
(iii) no party to the lease or sublease has
repudiated any provision thereof;
(iv) there are no disputes, oral agreements,
or forbearance programs in effect as to the lease or sublease:
(v) Verilux has not assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold; and
(vi) all facilities leased or subleased
thereunder have received all approvals of governmental authorities (including
licenses and permits) required in connection with the operation thereof, and
have been operated and maintained in accordance with applicable laws, rules, and
regulations in all material respects.
5.14 Intellectual Property.
(a) To the knowledge of Verilux, Verilux has not
interfered with, infringed upon, misappropriated or violated any Intellectual
Property rights of third parties. Verilux has not received since its inception
any charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that Verilux
must license or refrain from using any Intellectual Property rights of any third
party), except as disclosed in Section 5.14 of the Verilux Disclosure Schedule.
To the knowledge of Verilux, no third party has interfered with, infringed upon,
misappropriated, or violated any Intellectual Property rights of Verilux. Each
employee of Verilux has signed an invention assignment and/or confidentiality
agreement with Verilux that provides that any Intellectual Property developed by
such employee while employed by Verilux is the sole property of Verilux.
(b) Section 5.14(b) of the Verilux Disclosure
Schedule identifies (i) all Intellectual Property owned by Verilux and (ii) each
patent or registration which has been issued to
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Verilux or any Affiliate of Verilux with respect to any of the Intellectual
Property used in Verilux's business, (iii) each pending patent application or
application for registration which Verilux or any Affiliate of Verilux has made
with respect to any of the Intellectual Property used in Verilux's business, and
(iv) each material license, agreement, or other permission which Verilux or any
Affiliate of Verilux has granted to any third party with respect to any of the
Intellectual Property used in Verilux's business (together with any exceptions).
Verilux has delivered to Aspec correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permissions (as amended
to date). Section 5.14(b) of the Verilux Disclosure Schedule also identifies (i)
each trade name or unregistered trademark used by Verilux or any Affiliate of
Verilux which is material to the business of Verilux and (ii) each unregistered
copyright or trade secret owned by Verilux or any Affiliate of Verilux with
respect to Intellectual Property which is material to the business of Verilux.
With respect to each item of Intellectual Property required to be identified in
Section 5.14(b) of the Verilux Disclosure Schedule, to the knowledge of Verilux:
(i) Verilux possesses all right, title, and
interest in and to the item, free and clear of any Security Interest (except as
disclosed in Section 5.8 of the Verilux Disclosure Schedule), license or other
restriction;
(ii) the item is legal and valid and in full
force and effect and is not subject to any outstanding injunction, judgment,
order, decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to the
knowledge of Verilux, threatened which challenges the legality, validity,
enforceability, use or ownership of the item; and
(iv) Verilux has never agreed to indemnify
any Person for or against any interference, infringement, misappropriation, or
other conflict with respect to the item, except pursuant to the contracts set
forth in Section 5.17 of the Verilux Disclosure Schedule.
(c) Section 5.14(c) of the Verilux Disclosure
Schedule identifies each material item of Intellectual Property that any third
party owns and that Verilux uses pursuant to license, sublicense, agreement, or
permission. Verilux has delivered to Aspec correct and complete copies of all
such licenses, sublicenses, agreements, and permissions (as amended to date).
With respect to each item of Intellectual Property required to be identified in
Section 5.14(c) of the Verilux Disclosure Schedule, to the knowledge of Verilux:
(i) the license, sublicense, agreement or
permission covering the item is legal, valid, binding, enforceable, and in full
force and effect in all material respects;
(ii) no party to the license, sublicense,
agreement, or permission is in breach or default, and, to the knowledge of
Verilux, no event has occurred which with notice or lapse of time would
constitute a breach or default or permit termination, modification or
acceleration thereunder;
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<PAGE> 19
(iii) no party to the license, sublicense,
agreement, or permission has repudiated any provision thereof; and
(iv) Verilux has not granted any sublicense
or similar right with respect to the license, sublicense, agreement, or
permission.
5.15 Tangible Assets. The buildings, machinery, equipment,
and other tangible assets that Verilux owns and leases are free from material
defects (patent and latent) and are in good operating condition and repair
(subject to normal wear and tear) and are usable in the Ordinary Course of
Business.
5.16 Inventory. In all material respects, all of the
inventory of Verilux and any supplies, manufactured and processed parts, work in
process or finished goods, is usable, merchantable and fit for the purpose for
which it was procured or manufactured, and none of such inventory is
slow-moving, obsolete, damaged, or defective, subject to adjustments for
operations and transactions through the Closing Date in accordance with the past
custom and practice of Verilux.
5.17 Contracts. Section 5.17 of the Verilux Disclosure
Schedule lists the following contracts, agreements, commitments and other
arrangements to which Verilux is a party or by which Verilux or any of its
assets is bound:
(a) any agreement (or group of related agreements)
for the lease of personal property to or from any Person or license of any
software or Intellectual Property which involves the payment by or to Verilux of
more than $10,000 per year;
(b) any agreement (or group of related agreements)
for the purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services, the
performance of which will extend over a period of more than one year or involve
consideration in excess of $10,000;
(c) any agreement for the purchase of supplies,
components, products or services from single source suppliers, custom
manufacturers or subcontractors which involves the payment by Verilux of more
than $10,000 per year;
(d) any agreement concerning a partnership or joint
venture;
(e) any agreement (or group of related agreements)
under which it has created, incurred, assumed, or guaranteed any indebtedness
for borrowed money or any capitalized lease obligation in excess of $10,000 or
under which a Security Interest has been imposed on any of its assets, tangible
or intangible;
(f) any agreement concerning noncompetition or
restraint of trade or any agreement on currently active projects which involves
confidentiality;
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(g) any agreement with any Verilux shareholder or
any of such shareholder's Affiliates (other than Verilux) or with any Affiliate
of Verilux;
(h) any profit sharing, stock option, stock
purchase, stock appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors, officers or
employees;
(i) any collective bargaining agreement;
(j) any agreement for the employment of any
individual on a full-time, part-time, consulting, or other basis;
(k) any agreement under which it has advanced or
loaned any amount to any of its directors, officers, and employees;
(l) any agreement pursuant to which Verilux is
obligated to provide services, maintenance, support or training which involves
payments to Verilux of more than $50,000 per year;
(m) any standard form agreement used by Verilux,
including, but not limited to, any purchase order, statement of standard terms
and conditions of sale, or employment offer letter; and
(n) any other agreement (or group of related
agreements) the performance of which involves consideration in excess of $10,000
or which is expected to continue for more than six (6) months from the date
hereof.
Verilux has delivered to Aspec a correct and complete copy of each written
agreement listed in Section 5.17 of the Verilux Disclosure Schedule (as amended
to date) and a written summary setting forth the terms and conditions of each
oral agreement referred to in Section 5.17 of the Verilux Disclosure Schedule.
With respect to each such agreement: (A) the agreement is legal, valid, binding,
enforceable, and in full force and effect in all respects against Verilux and,
to the knowledge of Verilux, the other parties thereto; (B) Verilux is not and,
to the knowledge of Verilux, no other party is in breach or default, and no
event has occurred, which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; (C) Verilux has not and, to the knowledge of Verilux, no other party
has repudiated any provision of the agreement; and (D) Verilux does not have any
reason to believe that the service called for thereunder cannot be supplied in
accordance with its terms and without resulting in a loss to any of Verilux.
5.18 Notes and Accounts Receivable. All notes and accounts
receivable of Verilux, all of which are reflected properly on the books and
records of Verilux in all material respects, are, to the knowledge of Verilux,
(i) valid receivables subject to no setoffs, defenses or counterclaims, and are
current and collectible, and (ii) will be collected in accordance with their
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terms at their recorded amounts, subject only to adjustments for operations and
transactions through the Closing Date in accordance with the past custom and
practice of Verilux.
5.19 Power of Attorney. There are no outstanding powers of
attorney executed on behalf of Verilux.
5.20 Insurance. Verilux has delivered to Aspec copies of each
insurance policy (including policies providing property, casualty, liability,
and workers' compensation coverage and bond and surety arrangements) with
respect to which Verilux is a party, a named insured, or otherwise the
beneficiary of coverage. With respect to each such insurance policy: (A) the
policy is legal, valid, binding, enforceable, and in full force and effect (and
there has been no notice of cancellation or nonrenewal of the policy received)
with respect to Verilux and, to the knowledge of Verilux, the other parties
thereto; (B) neither Verilux nor, to the knowledge of Verilux, any other party
to the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with notice
or the lapse of time, would constitute such a breach or default, or permit
termination, modification, or acceleration, under the policy; (C) neither
Verilux nor, to the knowledge of Verilux, any other party to the policy has
repudiated any provision thereof; and (D) there has been no failure by Verilux
to give any notice or present any claim under the policy in due and timely
fashion. Section 5.20 of the Verilux Disclosure Schedule describes any
self-insurance arrangements presently maintained by Verilux.
5.21 Litigation. Section 5.21 of the Verilux Disclosure
Schedule sets forth each instance in which Verilux (or any of its assets) (i) is
subject to any outstanding injunction, judgment, order, decree, ruling, or
charge or (ii) is a party or, to the knowledge of Verilux, is threatened to be
made a party, to any action, suit, proceeding, hearing, arbitration, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator. To the knowledge of Verilux, there are no facts or circumstances
which would form the basis of any claim against Verilux.
5.22 Product Warranty. All of the services performed and
products licensed, manufactured, sold, leased, and delivered by Verilux have
conformed in all material respects with all applicable contractual commitments
and all express and implied warranties, and, to the knowledge of Verilux,
Verilux has no liability (whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due) for replacement or repair thereof or other
damages in connection therewith, other than in the Ordinary Course of Business
in an aggregate amount not exceeding $10,000. Section 5.17(o) of the Verilux
Disclosure Schedule includes copies of the standard terms and conditions of
license for Verilux (containing applicable guaranty, warranty, and indemnity
provisions).
5.23 Product Liability. To the knowledge of Verilux, Verilux
has no material liability (whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due) arising out of any injury to individuals or
property as a result of the ownership, possession, or use of any product
licensed, manufactured, sold, leased, or delivered by Verilux.
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5.24 Employees. No executive, key employee, or significant
group of employees has advised any executive officer of Verilux that he, she or
they plan to terminate employment with Verilux during the next six (6) months.
Verilux is not a party to or bound by any collective bargaining agreement, nor
has it experienced any strike or grievance, claim of unfair labor practices, or
other collective bargaining dispute. To the knowledge of Verilux, Verilux has
not committed any unfair labor practice. To the knowledge of Verilux, there is
no organizational effort presently being made or threatened by or on behalf of
any labor union with respect to employees of Verilux.
5.25 Employee Benefits.
(a) Section 5.25(a) of the Verilux Disclosure
Schedule lists each Employee Benefit Plan that Verilux maintains or to which
Verilux contributes or is obligated to contribute.
(i) Each such Employee Benefit Plan (and
each related trust, or fund established by Verilux) complies in form and in
operation in all material respects with their terms, the applicable requirements
of ERISA, the Code, and other applicable laws.
(ii) All required reports and descriptions
(including Form 5500 Annual Reports, Summary Annual Reports, PBGC-1's, and
Summary Plan Descriptions) have been filed or distributed appropriately with
respect to each such Employee Benefit Plan. The requirements of Code Sec. 4980B
have been met in all material respects with respect to each such Employee
Benefit Plan which is an Employee Welfare Benefit Plan. No event has occurred
and no condition exists with respect to any Employee Benefit Plan that would
subject Verilux to any tax under Code Sections 4972, 4976 or 4979 or to a fine
under ERISA Sections 502(i) or 502(l).
(iii) All contributions, premiums or other
payments (including all employer contributions and employee salary reduction
contributions) which are due have been paid to each Employee Benefit Plan and
all contributions, premiums or other payments for any period ending on or before
the Closing Date which are not yet due shall been paid to each such Employee
Benefit Plan or shall be accrued in accordance with the custom and practice of
Verilux.
(iv) Each such Employee Benefit Plan which is
an Employee Pension Benefit Plan and which is intended to qualify under Code
Sec. 401(a), has received a favorable determination letter from the Internal
Revenue Service with respect to the qualification of the plan under Code Section
401(a) and the exemption of any corresponding trust under Code Section 501,
unless the Internal Revenue Service is deemed to have approved the form of such
Plan under applicable IRS Revenue Procedures. A copy of such determination
letters have been provided to Aspec and nothing has occurred since the date of
each such determination letter that would cause such Employee Pension Benefit
Plan to lose its ability to rely on such letter. Each Employee Pension Benefit
Plan has been restated to comply with the 1986 Tax Reform Act and subsequent
applicable tax legislation to the extent required by governing tax law. A copy
of any determination letters applicable to such restatement which have been
received by Verilux has been provided to Aspec.
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<PAGE> 23
(v) Neither Verilux nor any other Person or
entity under common control with Verilux within the meaning of Section 414(b),
(c) or (m) of the Code and the regulations thereunder has now or at any previous
time, maintained, established, sponsored, participated in, or contributed to,
any Employee Pension Benefit Plan that is subject to Part 3 of Subtitle B of
Title I of ERISA, Title IV of ERISA or Section 412 of the Code. No Employee
Welfare Benefit Plan or other Employee Benefit Plan providing welfare benefits
is funded with a trust or other funding vehicle, other than insurance policies
or contracts with a health maintenance organization or similar health care
delivery entity.
(vi) Verilux has delivered to Aspec correct
and complete copies of the plan documents and summary plan descriptions, the
most recent determination letter received from the Internal Revenue Service, if
any, the most recent Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and other funding agreements which implement each
maintained Employee Benefit Plan. The terms of any such documentation or other
communication do not prohibit Aspec from amending or terminating any such
Employee Benefit Plan.
(b) With respect to each Employee Benefit Plan that
Verilux, and/or any controlled group of corporations within the meaning of Code
Sec. 1563 (a "CONTROLLED GROUP OF CORPORATIONS") which includes Verilux,
maintains or ever has maintained or to which any of them contributes, ever
contributed, or ever has been required to contribute:
(i) There have been no prohibited
transactions within the meaning of ERISA Sec 406 and Code Sec. 4975 with respect
to any such Employee Benefit Plan. No fiduciary within the meaning of ERISA Sec.
3(21) (a "FIDUCIARY"), has any liability for breach of fiduciary duty or any
other failure to act or comply in connection with the administration or
investment of the assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing, or investigation with respect to the administration or the
investment of the assets of any such Employee Benefit Plan (other than routine
claims for benefits) is pending or threatened.
(c) Except as disclosed in Schedule 5.25(c) of the
Verilux Disclosure Schedule, Verilux does not maintain or contribute to, has
never maintained or contributed to, and has never been required to contribute
to, any Employee Welfare Benefit Plan or any other Employee Benefit Plan
providing medical, health, or life insurance or other welfare-type benefits for
current or future retired or terminated employees, their spouses, or their
dependents (other than in accordance with Code Sec. 4980B or Part 6 of Subtitle
B of Title I of ERISA).
(d) There is no liability in connection with any
Employee Benefit Plan that is not fully disclosed or provided for on the Most
Recent Balance Sheet for which disclosure would be required under generally
accepted accounting principles.
(e) No Employee Benefit Plan or Verilux has any
liability to any plan participant, beneficiary or other person by reason of the
payment of benefits or the failure to pay benefits with respect to benefits
under or in connection with any such Employee Benefit Plan, other than claims in
the normal administration of such plans.
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5.26 Guaranties. Verilux is not a guarantor or otherwise
responsible for any liability or obligation (including indebtedness) of any
other Person.
5.27 Environment, Health, and Safety.
(a) For purposes of this Agreement, the following
terms have the following meanings:
"ENVIRONMENTAL, HEALTH, AND SAFETY LAWS" means any and
all federal, state, local or municipal laws, rules, orders, regulations,
statutes, ordinances, codes, plans, injunctions, judgments, decrees,
requirements or rulings now or hereafter in effect, imposed by any governmental
authority regulating, relating to, or imposing liability or standards of conduct
relating to pollution or protection of the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), public health and safety, or employee health and safety, concerning any
Hazardous Materials or Extremely Hazardous Substances, as such terms as defined
herein, or otherwise regulated, under any Environmental, Health and Safety Laws.
The term "ENVIRONMENTAL, HEALTH AND SAFETY LAWS" shall include, without
limitation, the Clean Water Act (also known as the Federal Water Pollution
Control Act), 33 U.S.C. Section 1251 et seq., the Toxic Substances Control Act,
15 U.S.C. Section 2601 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et
seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section
136 et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986,
Public Law 99-4, 99, 100 Stat. 1613, the Emergency Planning and Community Right
to Know Act, 42 U.S.C. Section 11001 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq., and the Occupational Safety and
Health Act, 29 U.S.C. Section 651 et seq., all as amended, together with any
amendments thereto, regulations promulgated thereunder and all substitutions
thereof.
"EXTREMELY HAZARDOUS SUBSTANCE" means a substance on the
list described in Section 302 (42 U.S.C. Section 11002(a)(2)) of the Emergency
Planning and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., as
amended.
"HAZARDOUS MATERIAL" means any material or substance
that, whether by its nature or use, is now or hereafter defined as a pollutant,
dangerous substance, toxic substance, hazardous waste, hazardous material,
hazardous substance or contaminant under any Environmental, Health and Safety
Laws, or which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and which is now or
hereafter regulated under any Environmental, Health and Safety Laws, or which is
or contains petroleum, gasoline, diesel fuel or other petroleum hydrocarbon
product.
(b) To the knowledge of Verilux, each of Verilux and
its predecessors and Affiliates (A) has complied with the Environmental, Health,
and Safety Laws (and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, directive or notice has been filed or
commenced against any of them alleging any such failure to comply), (B) has
obtained and been in substantial compliance with all of the terms and conditions
of all permits, licenses, certificates and other authorizations which are
required under the Environmental, Health, and Safety
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<PAGE> 25
Laws, and (C) has complied in all material respects with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules, and timetables which are contained in the Environmental, Health, and
Safety Laws.
(c) To the knowledge of Verilux, Verilux has no
liability (whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due), and none of Verilux and its predecessors and Affiliates
has handled or disposed of any Hazardous Materials or extremely Hazardous
Substances, arranged for the disposal of any Hazardous Materials or Extremely
Hazardous Substances, exposed any employee or other individual to any Hazardous
Materials or Extremely Hazardous Substances, or owned or operated any property
or facility in any manner that could give rise to any liability, for damage to
any site, location, surface water, groundwater, land surface or subsurface
strata, for any illness of or personal injury to any employee or other
individual, or for any reason under any Environmental, Health, and Safety Law.
(d) To the knowledge of Verilux, no Extremely
Hazardous Substances are currently, or have been, located at, on, in, under or
about all properties and equipment used in the business of Verilux and its
predecessors and Affiliates.
(e) To the knowledge of Verilux, no Hazardous
Materials are currently located at, on, in, under or about all properties and
equipment used in the business of Verilux and its predecessors and Affiliates in
a manner which violates any Environmental, Health and Safety Laws or which
requires cleanup or corrective action of any kind under any Environmental,
Health and Safety Laws.
5.28 Certain Business Relationships With Verilux. None of the
Majority Shareholders nor Verilux nor any director or officer of Verilux, nor
any member of their immediate families, nor any Affiliate of any of the
foregoing, owns, directly or indirectly, or has an ownership interest in any
business (corporate or otherwise) which is a party to, or in any property which
is the subject of, any business arrangement or relationship of any kind with
Verilux.
5.29 No Adverse Developments. To the knowledge of Verilux,
there is no development (exclusive of general economic factors affecting
business in general) or threatened development affecting Verilux (or affecting
customers, suppliers, employees, and other Persons which have relationships with
Verilux) that (i) is having or is reasonably likely to have a Material Adverse
Effect on Verilux, or (ii) would prevent Aspec from conducting the business of
the Surviving Corporation following the Closing in the manner in which it was
conducted or planned to be conducted by Verilux prior to the Closing.
5.30 Full Disclosure. No representation or warranty in this
Section 5 or in any document delivered by the Majority Shareholders or Verilux
pursuant to the transactions contemplated by this Agreement, and no statement,
list, certificate or instrument furnished to Aspec pursuant hereto or in
connection with this Agreement, when taken as a whole, contains any untrue
statement of a material fact, or omits to state any fact necessary to make any
statement herein or therein not materially misleading. There is no fact,
development or threatened development
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<PAGE> 26
(excluding general economic factors affecting business in general) known to
Verilux or the Majority Shareholders which Verilux has not disclosed to Aspec
and which is having or may have a Material Adverse Effect on Verilux. Verilux
has delivered to Aspec true, correct and complete copies of all documents,
including all amendments, supplements and modifications thereof or waivers
currently in effect thereunder, described in the Verilux Disclosure Schedule.
6. Representations and Warranties of Aspec. Aspec represents and
warrants to Verilux that the statements contained in this Section 6 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 6), except as
set forth in the disclosure schedule delivered by Aspec to Verilux on the date
hereof (and initialed by Aspec and Verilux), a copy of which is attached hereto
as Exhibit D (referred to herein as the "ASPEC DISCLOSURE SCHEDULE"). The Aspec
Disclosure Schedule will be arranged in paragraphs corresponding to the numbered
paragraphs contained in this Section 6.
6.31 Organization, Qualification, and Corporate Power. Aspec
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Delaware. Aspec is duly authorized to conduct business
and is in good standing under the laws of each other jurisdiction where such
qualification is required. Aspec has full corporate power and authority, and has
all necessary and material licenses and permits, to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it.
6.32 Authorization. Aspec has full power and authority to
execute and deliver this Agreement and the Merger Agreement, and to consummate
the transactions contemplated hereunder and to perform its obligations hereunder
and no other proceedings on the part of Aspec is necessary to authorize the
execution, delivery and performance of this Agreement and the Merger Agreement.
This Agreement and the Merger Agreement and the transactions contemplated
thereby have been approved by the unanimous vote of Aspec's Board of Directors.
This Agreement and the Merger Agreement constitute the valid and legally binding
obligations of Aspec enforceable against Aspec in accordance with their
respective terms and conditions. Aspec need not give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any government
or governmental agency in order to consummate the transactions contemplated by
this Agreement.
6.33 Capitalization.
(a) As of May 31, 1999, the authorized capital stock
of Aspec consisted of (i) 75,000,000 shares of Common Stock, of which 28,066,000
shares were issued and outstanding, (iii) 5,000,000 shares of undesignated
preferred stock, none of which were issued and outstanding, and (iv) an
aggregate of approximately 2,773,150 shares were subject to outstanding options
or reserved for issuance pursuant to Aspec's employee and director stock plans.
All of the outstanding shares of Aspec's capital stock have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
this Section 6.3, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of Aspec or obligating Aspec to issue or sell any shares of
capital stock of, or other equity
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<PAGE> 27
interests in, Aspec. The authorized capital stock of Merger Sub consists of
1,000 shares of common stock, all of which are held of record by Aspec.
(b) The shares of Aspec Common Stock to be issued
pursuant to Section 3.1 of this Agreement are duly authorized and reserved for
issuance, and upon issuance thereof will be validly issued, fully paid and
nonassessable.
6.34 Noncontravention. Neither the execution and the delivery
of this Agreement nor the consummation of the transactions contemplated hereby,
will (A) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Aspec is subject or any provision of its
Certificate of Incorporation or bylaws, or (B) (i) conflict with, (ii) result in
a breach of, (iii) constitute a default under, (iv) result in the acceleration
of, (v) create in any party the right to accelerate, terminate, modify, or
cancel, or (vi) require any notice under, any agreement, contract, lease,
license, instrument, or other arrangement to which Aspec is a party or by which
it is bound or to which any of its assets is subject.
6.35 Brokers' Fees. Aspec has no liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
6.36 SEC Filings. ASPEC has filed all forms, reports and
documents required to be filed with the SEC since April 1, 1998, and has made
available to Verilux such forms, reports and documents in the form filed with
the SEC. All such required forms, reports and documents (including those that
ASPEC may file subsequent to the date hereof) are referred to herein as the
"ASPEC SEC Reports". As of their respective dates, the ASPEC SEC Reports (i)
were prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such ASPEC SEC Reports, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of ASPEC's
subsidiaries is required to file any forms, reports or other documents with the
SEC.
6.37 Financial Statements. Each of the consolidated
financial statements (including, in each case, any related notes thereto)
contained in ASPEC SEC Reports ( the "ASPEC Financials"), including any ASPEC
SEC Reports filed after the date hereof until the Closing, (i) was compiled as
to form in all material respects with the published rules and regulations of the
SEC with respect thereto, (ii) was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited interim financial statements, as
may be permitted by the SEC on Form 10-Q under the Exchange Act) and (iii)
fairly presented the consolidated financial position of ASPEC and it's
subsidiaries as at the respective dates thereof and the consolidated results of
ASPEC's operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments. The balance sheet of ASPEC contained in
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<PAGE> 28
ASPEC SEC Form 10Q Report as of May 31, 1999 is hereinafter referred to as the
"ASPEC Balance Sheet."
6.38 Litigation. Section 6.8 of the Aspec Disclosure Schedule
sets forth each instance in which Aspec (or any of its assets) (i) is subject to
any outstanding injunction, judgment, order, decree, ruling, or charge or (ii)
is a party or, to the knowledge of Aspec, is threatened to be made a party, to
any action, suit, proceeding, hearing, arbitration, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator.
6.9 No Adverse Developments. To the knowledge of Aspec,
there is no development (exclusive of general economic factors affecting
business in general) or threatened development affecting Aspec (or affecting
customers, suppliers, employees, and other Persons which have relationships with
Aspec) that (i) is having or is reasonably likely to have a Material Adverse
Effect on Aspec, or (ii) would prevent Aspec from conducting its business
following the Closing in the manner in which it was conducted or planned to be
conducted by Aspec prior to the Closing.
7. Pre-Closing Covenants. With respect to the period between the
execution of this Agreement and the earlier of the termination of this Agreement
in accordance with Section 11 hereof and the Effective Time of the Merger:
7.39 General. Each of the Parties will use their reasonable
best efforts to take all actions and to do all things necessary, proper, or
advisable in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
closing conditions set forth in Section 9 below).
7.40 Notices and Consents. Except as otherwise agreed to by
Aspec, Verilux will give any notices to third parties and will use its best
efforts to obtain any third party consents that are required in connection with
the matters identified in Section 5.4 of the Verilux Disclosure Schedule. Each
of the Parties will give any notices to, make any filings with, and use its best
efforts to obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters identified in Section 5.4
of the Verilux Disclosure Schedule.
7.41 Conduct of Business. Verilux will not engage in any
practice, take any action, or enter into any transaction outside the Ordinary
Course of Business. Without limiting the generality of the foregoing, Verilux
will not (a) issue or sell, or contract to issue or sell, any shares of its
capital stock or that of any of its subsidiaries or any securities convertible
into to exchangeable for shares of capital stock of it or any of its
subsidiaries, or securities, warrants, options or rights to purchase any of the
foregoing (other than shares issued upon exercise of outstanding options or upon
the conversion of outstanding convertible securities described on the Verilux
Disclosure Schedule), (b) purchase or redeem any shares of its capital stock,
(c) declare or pay any dividends or agree to make any other distribution with
respect to any shares of its capital stock, (d) amend its Articles of
Incorporation or Bylaws, or (e) enter into or propose to enter into an agreement
with any other person providing for the possible acquisition by it or any of its
subsidiaries (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) of any material portion of the capital
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<PAGE> 29
stock or assets of another entity. In addition, Verilux will comply with all
laws, statutes, ordinances, rules, regulations and orders applicable to it or to
the conduct of its business, except for violations that could not subject
Verilux to a penalty or loss that could constitute a Material Adverse Effect on
Verilux.
7.42 Preservation of Business. Verilux will use its best
efforts to keep its business and properties substantially intact, including its
present operations, physical facilities, working conditions, and relationships
with lessors, licensors, suppliers, customers and employees. Aspec will use its
best efforts to keep its business and properties substantially intact, including
its present operations, physical facilities, working conditions, and
relationships with lessors, licensors, suppliers, customers and employees.
7.43 Access to Information. Verilux will permit Aspec and its
representatives to have access at all reasonable times, and in a manner so as
not to interfere with the normal business operations of Verilux, to the business
and operations of Verilux. Neither such access, inspection and furnishing of
information to Aspec and its representatives, nor any investigation by Aspec and
its representatives, shall in any way diminish or otherwise effect Aspec's right
to rely on any representation or warranty made by Verilux or the Majority
Shareholders hereunder. Aspec will permit Verilux and its representatives to
have access at all reasonable times, and in a manner so as not to interfere with
the normal business operations of Aspec, to the business and operations of
Aspec. Neither such access, inspection and furnishing of information to Verilux
and its representatives, nor any investigation by Verilux and its
representatives, shall in any way diminish or otherwise effect Verilux's right
to rely on any representation or warranty made by Aspec hereunder.
7.44 Notice of Developments. Each Party will give prompt
written notice to the others of any adverse development causing a material
breach of any of its own representations and warranties in Section 5 or Section
6 above. No disclosure by any Party pursuant to this Section 7.6, however, shall
be deemed to amend or supplement the Verilux Disclosure Schedule or the Aspec
Disclosure Schedule or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant.
7.7 Exclusivity. From and after the date hereof through the
date which is thirty (30) days following the termination of this Agreement
pursuant to Section 11 hereof, without the prior written consent of Aspec,
neither Verilux, the Majority Shareholders nor any of Verilux's other officers,
directors, shareholders, agents or Affiliates shall, directly or indirectly, (a)
solicit, conduct discussions with or engage in negotiations with any person,
other than Aspec, relating to the possible acquisition of Verilux or any of its
subsidiaries (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any material portion of its or their capital stock or
assets, (b) provide information with respect to Verilux or any of its
subsidiaries to any person, other than Aspec, relating to the possible
acquisition of Verilux or any of its subsidiaries (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (c) enter into an agreement
with any person, other than Aspec, providing for the acquisition of Verilux or
any of its subsidiaries (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (d) make or authorize any statement, recommendation or
solicitation in support of any
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possible acquisition of Verilux or any of it subsidiaries (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its or their capital stock or assets by any person, other
than by Aspec, (e) enter into any agreement with any person, other than Aspec,
providing for any extension of credit (other than trade credit in the ordinary
course of business) or other debt investment in Verilux, or (f) enter into any
additional agreement for the licensing or distribution of products, technology,
or intellectual property of Verilux, whether now existing or hereafter created.
In addition to the foregoing, if Verilux or any of its subsidiaries receives any
unsolicited offer or proposal to enter negotiations relating to any of the
above, Verilux shall immediately notify Aspec thereof, including information as
to the identity of the offeror or the party making any such offer or proposal
and the specific terms of such offer or proposal, as the case may be. From and
after the date hereof until the first to occur of the Closing of the Merger or
the termination of this Agreement pursuant to Section 11 hereof, none of the
Majority Shareholders will transfer or offer to transfer any of their Verilux
Common Stock except to Aspec pursuant to the Merger.
8. Post-Closing Covenants. With respect to the period following the
Effective Time of the Merger:
8.1 General. In case at any time after the Effective Time of
the Merger any further action is necessary to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor under
Section 10 below).
8.2 Litigation Support. In the event and for so long as any
Party actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction (A) on or
prior to the Effective Time of the Merger involving Verilux or the Majority
Shareholders or (B) arising out of Aspec's operation of the business of the
Surviving Corporation following the Effective Time of the Merger in the manner
in which it is presently conducted and planned to be conducted, each of the
other Parties will cooperate with the party, its counsel in the contest or
defense, make available their personnel, and provide such testimony and access
to their books and records as shall be reasonably necessary in connection with
the contest or defense, all at the sole cost and expense of the contesting or
defending Party (unless the contesting or defending Party is entitled to
indemnification therefor under Section 10 below).
8.3 Transition. None of the Majority Shareholders will take
any action that is designed or intended to have the effect of discouraging any
lessor, licensor, customer, supplier, or other business associate of Verilux
from maintaining the same business relationships with the Surviving Corporation
after the Effective Time of the Merger as it maintained with Verilux prior to
the Effective Time of the Merger.
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8.4 Confidentiality. Each of the parties hereto hereby
agrees to keep such information or knowledge obtained in any due diligence or
other investigation pursuant to the negotiation and execution of this Agreement
or the effectuation of the transactions contemplated hereby, confidential in
accordance with the terms of that certain Nondisclosure and Nonsolicitation
Agreement between Aspec and Verilux dated June 7, 1999 (the "NONDISCLOSURE
AGREEMENT").
8.5 Verilux Employees; Employee Stock Options. Upon the
Effective Date of the Merger, all employees of Verilux shall be offered
employment with the Surviving Corporation. In addition, upon the Effective Date
of the Merger, Verilux employees and certain future employees shall be granted
options to purchase an aggregate of 500,000 shares of Aspec Common Stock (in
such amounts to be mutually determined by the Chief Executive Officer of Verilux
and Aspec). In each case, such options shall be granted at the fair market value
of the Aspec Common Stock at the date of grant and shall vest monthly over a
four-year period. The options shall also be subject to the other terms and
conditions of Aspec's 1996 Stock Option Plan (the "STOCK PLAN"). All employees
of Verilux that are employees of the Surviving Corporation following the Closing
shall execute Aspec's standard form of employee confidentiality and inventions
assignment agreement.
9. Conditions to Obligations to Close.
9.1 Conditions to Aspec's Obligation to Close. The
obligations of Aspec to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the following
conditions:
(a) the representations and warranties of Verilux
and the Majority Shareholders set forth in Section 5 above shall be true and
correct in all material respects at and as of the Closing Date;
(b) Verilux and the Majority Shareholders shall have
performed and complied with all of their respective covenants hereunder in all
material respects through the Closing;
(c) Verilux shall have obtained such of the third
party consents listed on Section 5.4 of the Verilux Disclosure Schedule as may
be mutually agreed to by Aspec and Verilux;
(d) no action, suit, or proceeding shall be pending
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator (other than such
an action initiated by Aspec or Merger Sub) wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (A) prevent consummation of any
of the transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) affect materially and adversely the right of Aspec or
Merger Sub to control Verilux following the Effective Time of the Merger, and no
law, statute, ordinance, rule, regulation or order shall have been enacted,
enforced or entered which has caused or will likely cause any of the effects
under clause (A), (B) or (C) of this Section 9.1(d) to occur.
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<PAGE> 32
(e) the President and the Chief Financial Officer of
Verilux and the Majority Shareholders shall have delivered to Aspec a
certificate to the effect that each of the conditions specified above in Section
9.1(a) to 9.1(d) (inclusive) is satisfied in all material respects;
(f) No Material Adverse Effect shall have occurred
with respect to Verilux;
(g) Aspec shall have received from counsel to
Verilux and the Majority Shareholders an opinion in form and substance as set
forth in Exhibit E attached hereto, addressed to Aspec, and dated as of the
Closing Date;
(h) this Agreement and the Merger shall have been
approved by the vote of the holders of 100% of the outstanding shares of Common
Stock of Verilux;
(i) all outstanding options, convertible securities
and other Stock Rights to purchase securities of Verilux shall have been
exercised or canceled; and
(j) Soo-Young Oh, Kuo-Hak Kim, Won-Young Jung,
Yung-Jun Kwon, and Hyun-Gan Kim shall have accepted employment with the
Surviving Corporation; and
(k) Aspec's Board of Directors shall have approved
this Agreement.
Aspec may waive any condition (in whole or in part) specified in
this Section 9.1 if it executes a writing so stating at or prior to the Closing.
9.2 Conditions to Verilux's Obligation. The obligation of
Verilux and the Majority Shareholders to consummate the transactions to be
performed by each of them in connection with the Closing is subject to
satisfaction of the following conditions:
(a) the representations and warranties of Aspec set
forth in Section 6 above shall be true and correct in all material respects at
and as of the Closing Date;
(b) Aspec shall have performed and complied with all
of its covenants hereunder in all material respects through the Closing;
(c) no action, suit, or proceeding shall be pending
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator (other than such
an action initiated by Verilux or any of the Majority Shareholders) wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this Agreement
or (B) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);
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<PAGE> 33
(d) the Chief Executive Officer or other duly
authorized officer of Aspec shall have delivered to Verilux a certificate to the
effect that each of the conditions specified above in Section 9.2(a) to 9.2(c)
(inclusive) is satisfied in all material respects;
(e) Verilux shall have received from counsel to
Aspec an opinion in form and substance as set forth in Exhibit F attached
hereto, addressed to Verilux, and dated as of the Closing Date;
(f) No Material Adverse Change shall have occurred
with respect to Aspec.
Verilux and the Majority Shareholders may waive any condition
(in whole or in part) specified in this Section 9.2 if Verilux executes a
writing so stating at or prior to the Closing.
10. Survival of Representations, Indemnification.
10.1 Limited Survival of Representations and Warranties. All
covenants of Aspec, Merger Sub, Verilux and the Majority Shareholders to be
performed prior to the Effective Time of the Merger, and all representations and
warranties of Aspec, Verilux and the Majority Shareholders in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the Merger
for a period of twelve (12) months from the Effective Time of the Merger (the
"EXPIRATION DATE"), and, notwithstanding anything to the contrary in this
Agreement, no claim for breach of any representation, warranty or covenant by
any Party and no claim for indemnification by Aspec or the Majority Shareholders
hereunder shall be brought at any time after the Expiration Date.
10.2 Indemnification by Aspec.
(a) From and after the Effective Time of the Merger,
Aspec shall indemnify and hold harmless each of the Majority Shareholders, and
each of the heirs, executors, successors and assigns of any of the foregoing,
from and against any and all Losses arising out of, or in connection with, any
breach of any representation or warranty or of any covenant, agreement, or
undertaking made by Aspec in this Agreement.
(b) Notwithstanding any provision to the contrary in
this Agreement, the maximum obligation and liability of Aspec and Merger Sub to
any Verilux shareholder (including the Majority Shareholders) shall be
determined by multiplying the number of shares of Aspec Common Stock received by
each such Verilux shareholder in the Merger by $1.00.
10.3 Indemnification by Majority Shareholders.
(a) From and after the Effective Time of the Merger,
each of Verilux and the Majority Shareholders shall indemnify and hold harmless
Aspec, Merger Sub and each of their respective Affiliates, and each of their
respective directors, officers, employees and agents, and each of the heirs,
executors, successors and assigns of any of the foregoing, from and against any
and all Losses arising out of, or in connection with, any breach of any
representation or warranty or of any
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<PAGE> 34
covenant, agreement, or undertaking made by Verilux or the Majority Shareholders
in this Agreement. The liability of the Majority Shareholders hereunder shall be
several in proportion to number of shares of Aspec Common Stock received by each
such Majority Shareholder and his Affiliates as a result of the Merger, and not
joint.
(b) The Majority Shareholders may agree, as among
themselves and without limiting the rights of Aspec or Merger Sub hereunder, as
to the respective amounts of any liability for which they each shall be
responsible.
(c) Any payment made pursuant to this Section 10.3
or Section 10.2 hereof shall be treated by the Parties as an adjustment to the
purchase price provided for herein, and the Parties agree not to take any
position inconsistent therewith for any purpose.
10.4 Notice of Claims. No action or proceeding may be brought
by a party seeking indemnification hereunder (the "INDEMNIFIED PARTY") with
respect to any breach of the representations, warranties, covenants or
agreements made hereunder unless written notice thereof, setting forth in
reasonable detail (to the extent then known) the amount of the claim and the
claimed misrepresentation or breach of warranty or breach of covenant or
agreement, or the reasons for which such Indemnified Party believes there has
been or may have been a breach of representation, warranty, covenant or
agreement, shall have been delivered to the party alleged to have breached such
representation, warranty, covenant or agreement (the "INDEMNIFYING PARTY") on or
prior to the Expiration Date. If the Indemnifying Party contests the assertion
of the claim, then the parties shall act in good faith to reach agreement
regarding such claim.
10.5 Third Party Claims. If a claim by a third party is made
against an Indemnified Party, and if such Indemnified Party intends to seek
indemnity with respect thereto under this Section 10, such Indemnified Party
shall promptly notify the Indemnifying Party in writing of such claims setting
forth such claims in reasonable detail; provided, however, that failure of such
Indemnified Party to give such notice shall not result in a waiver of its
indemnity rights except to the extent that such failure prejudices the
Indemnifying Party's ability to respond to or defend the claim. The Indemnifying
Party shall have thirty (30) days after receipt of such notice to undertake,
through counsel of its own choosing and at its own expense, the settlement or
defense thereof, and the Indemnified Party shall cooperate with it in connection
therewith; provided, however, that the Indemnified Party may participate in such
settlement or defense through counsel chosen by such Indemnified Party, provided
that the fees and expenses of such counsel shall be borne by such Indemnified
Party. The Indemnified Party shall not pay or settle any claim without the
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld. The Indemnifying Party will not pay or settle any claim
unless it contains an unconditional release of the Indemnified Party. If the
Indemnifying Party does not within thirty (30) days after the receipt of the
Indemnified Party's notice of a claim of indemnity hereunder undertake the
defense thereof or if the Indemnified Party must obtain separate legal counsel
due to an actual or potential conflict arising from such claim (as determined in
good faith by the Indemnified Party's legal counsel), the Indemnified Party
shall have the right to contest, settle or compromise the claim but shall not
thereby waive any right to indemnity therefor (and for all associated reasonable
costs and attorney's
- 34 -
<PAGE> 35
fees which, in the case of such costs and fees, shall be reimbursed by the
Indemnifying Party as incurred) pursuant to this Agreement.
10.6 Limitation of Claims. The Majority Shareholders shall
not be liable for any claims by Aspec made hereunder unless and until the
aggregate amount of all such claims against one or more of the Majority
Shareholders exceeds $10,000, provided that in the event such claims exceed
$10,000, Aspec shall be entitled to recover for the full amount of such claims
(including the $10,000 limitation). Aspec and Merger Sub shall not be liable for
any claims by the Majority Shareholders made hereunder unless and until the
aggregate amount of all such claims against Aspec and Merger Sub exceeds
$10,000, provided that in the event such claims exceed $10,000, the Majority
Shareholders shall be entitled to recover for the full amount of such claims
(including the $10,000 limitation).
11. Termination.
11.1 Termination of the Agreement. This Agreement may be
terminated at any time prior to the Closing as follows:
(a) Aspec and Verilux may terminate this Agreement
as to all Parties by mutual written consent at any time prior to the Closing.
(b) Aspec may terminate this Agreement by giving
written notice to Verilux and the Majority Shareholders at any time prior to the
Closing (A) in the event either of Verilux or the Majority Shareholders has
materially breached any representation, warranty, or covenant contained in this
Agreement and Aspec has notified Verilux and the Majority Shareholders of the
breach or (B) if the Closing shall not have occurred on or before August 6,
1999, by reason of the failure of any condition precedent under Section 9.1
hereof (unless the failure results primarily from Aspec itself materially
breaching any representation, warranty, or covenants contained in this
Agreement).
(c) Aspec may terminate this Agreement by giving
written notice to Verilux and the Majority Shareholders at any time prior to
5:00 p.m. (California time) on August 2, 1999 in the event that Aspec is not
satisfied in its sole discretion with the results of its due diligence
investigation regarding the business and financial and corporate records of
Verilux.
(d) Verilux may terminate this Agreement by giving
written notice to Aspec at any time prior to the Closing (A) in the event Aspec
has materially breached any representation, warranty, or covenant contained in
this Agreement and Verilux has notified Aspec of the breach, or (B) if the
Closing shall not have occurred on or before August 6, 1999, by reason of the
failure of any condition precedent under Section 9.2 hereof (unless the failure
results primarily from Verilux or the Majority Shareholders materially breaching
any representation, warranty, or covenants contained in this Agreement).
11.2 Effect of Termination.
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<PAGE> 36
(a) If any Party terminates this Agreement pursuant to Section 11
above, all rights and obligations of the Parties hereunder shall terminate
without any liability of any Party to any other Party (except for any liability
of any Party then in breach); provided, however, that the Confidentiality
Agreement shall survive in accordance with its terms.
12. Miscellaneous.
12.1 Publicity. No Party shall issue any press release or
make any public announcement relating to the subject matter of this Agreement
prior to the Closing without the prior written approval of Aspec and Verilux.
Notwithstanding the foregoing, Aspec may disclose the Merger in its filings with
the Securities and Exchange Commission to the extent required by applicable
securities laws.
12.2 No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties, the
shareholders of Verilux and their respective successors and permitted assigns.
12.3 Entire Agreement. This Agreement (including the exhibits
and schedules hereto) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof (including that certain letter agreement between Aspec and
Verilux dated June 10, 1999). Notwithstanding the foregoing, Verilux and Aspec
agree that the terms of the Confidentiality Agreement shall remain in effect.
12.4 Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the Parties named herein and their
respective successors and permitted assigns. No Party may assign either this
Agreement or any of its rights, interests, or obligations hereunder without the
prior written approval of the other Parties.
12.5 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
12.6 Headings. The Section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
12.7 Notices. All notices and other communications required
or permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one (1) business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
(1) business day after the business day of facsimile transmission, if delivered
by facsimile transmission with copy by first class mail, postage prepaid, and
shall be addressed to the intended recipient as set forth below:
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<PAGE> 37
If to Aspec or Merger Sub:
Aspec Technology, Inc.
830 East Arques Avenue
Sunnyvale, California 94086
Attention: Douglas E. Klint, President and Chief Executive
Officer
Copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: J. Robert Suffoletta, Esq.
If to Verilux or the Majority Shareholders:
Verilux Design Technology
4633 Old Ironsides Drive, Suite 460
Santa Clara, California 95054
Attention: Jessup N. Lee, President and Chief Executive
Officer
Any Party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
Parties written notice of such change in accordance with the above provisions.
12.8 Governing Law; Dispute Resolution.
(a) This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of California
without giving effect to any choice or conflict of law provision or rule
(whether of the State of California or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
California.
(b) It is the express intention of the Parties to
this Agreement to make a good faith effort to resolve, without resort to
arbitration, any dispute arising under or related to this Agreement. In the
event of a dispute relating to any provision of this Agreement which cannot be
resolved promptly by negotiations between the Parties involved directly in the
dispute, any Party to the dispute may give the other Party written notice of its
intent to arbitrate, as provided in this Section 12.8. No arbitration may
commence earlier than thirty (30) days after the delivery of the notice of
intent to arbitrate, unless the failure to commence arbitration is reasonably
likely to result in some demonstrable harm.
- 37 -
<PAGE> 38
(c) The Parties hereto agree that the appropriate
and exclusive forum for any disputes among any of the Parties hereto arising out
of this Agreement or the transactions contemplated hereby, shall be settled by
arbitration in Santa Clara County, California, in accordance with the rules of
the American Arbitration Association, and judgment upon any award rendered by
the arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitration panel will consist of three (3) people to be mutually
selected by the Parties to the dispute. In the event that the Parties to the
dispute cannot agree upon the arbitrators within ten (10) days after the
commencement of the arbitration procedures, one (1) arbitrator shall be selected
by Aspec, one (1) arbitrator shall be selected by the Majority Shareholders
involved in the dispute and one (1) arbitrator shall be selected by the two (2)
other arbitrators so designated. The parties further agree, to the extent
permitted by law, that final and non-appealable judgment against any of them in
any action or proceeding contemplated above shall be conclusive and may be
enforced in any other jurisdiction within or outside the United States by suit
on the judgment, a certified or exemplified copy of which shall be conclusive
evidence of the fact and amount of such judgment. The Parties hereby consent to
the jurisdiction of the Superior Court of the State of California and the United
States District Courts of California and waive any objections or rights as to
forum nonconvenience, lack of personal jurisdiction or similar grounds with
respect to the enforcement of any such judgment.
(d) In the event of any arbitration proceeding
hereunder, the arbitrator(s) shall have the discretion to award the prevailing
party reimbursement of all costs and expenses incurred in connection with said
action, including reasonable attorney's fees.
(e) To the extent that Aspec or the Majority
Shareholders have or hereafter may acquire any immunity from jurisdiction of any
court or from any legal process (whether through service or notice, attachment
prior to judgment, attachment in aid of execution, execution or otherwise) with
respect to itself or its property, Aspec and the Majority Shareholders (as the
case may be) hereby irrevocably waive such immunity in respect of its
obligations with respect to this Agreement.
12.9 Amendments and Waivers. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
Aspec, Merger Sub, Verilux and the Majority Shareholders. No waiver by any Party
of any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent
occurrence.
12.10 Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
12.11 Expenses. Each of Aspec, Verilux and the Majority
Shareholders will bear its or their own costs and expenses (including legal and
accounting fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby; provided, however, that
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<PAGE> 39
the Majority Shareholders will be responsible for (i) any brokers', finders' or
advisory fees payable on behalf of Verilux in connection with the Agreement and
the transactions contemplated hereby, and (ii) any legal or accounting fees
undertaken on behalf of Verilux or the Majority Shareholders in connection with
the Agreement and the transactions contemplated hereby in excess of $50,000
which may be paid by Verilux.
12.12 Construction. The Parties have participated jointly in
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
12.13 Incorporation of Exhibits and Schedules. The Exhibits
identified in this Agreement are incorporated herein by reference and made a
part hereof.
THIS SPACE LEFT INTENTIONALLY BLANK
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<PAGE> 40
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
as of the date first above written.
Aspec: ASPEC TECHNOLOGY, INC.
By:
-----------------------------------
Conrad J. Dell'Oca
Chairman of the Board
of Directors
Merger Sub: ASPEC ACQUISITION CORPORATION
By:
-----------------------------------
Douglas E. Klint
President
Verilux: VERILUX DESIGN TECHNOLOGY
By:
-----------------------------------
Jessup N. Lee
President and Chief Executive
Officer
Majority Shareholders:
------------------------------------
Jessup N. Lee
------------------------------------
Soo-Young Oh
[AGREEMENT AND PLAN OF REORGANIZATION SIGNATURE PAGE]
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<PAGE> 1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ASPEC TECHNOLOGY, INC.,
ASPEC ACQUISITION CORPORATION,
CHIP & CHIP, INC.
AND CERTAIN SHAREHOLDERS OF
CHIP & CHIP, INC.
JULY 30, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Certain Definitions......................................................................1
2. The Merger...............................................................................3
2.1 Merger; Effective Time of the Merger..............................................3
2.2 Closing...........................................................................3
2.3 Effect of the Merger..............................................................3
2.4 Tax-Free Reorganization...........................................................4
2.5 Chip & Chip Stock Options and Convertible Securities..............................4
3. Effect of Merger on the Capital Stock of Chip & Chip; Exchange of Certificates ..........4
3.1 Exchange of Stock.................................................................4
3.2 Fractional Shares.................................................................5
3.3 Exchange of Certificates..........................................................5
3.4 Taking of Necessary Action; Further Action........................................6
4. Securities Act Compliance................................................................6
4.1 Securities Act Exemption..........................................................6
4.2 Stock Restrictions................................................................6
5. Representations and Warranties of Chip & Chip and the Majority Shareholders..............7
5.1 Organization, Qualification, and Corporate Power..................................7
5.2 Authorization.....................................................................7
5.3 Capitalization....................................................................7
5.4 Noncontravention..................................................................8
5.5 Broker's Fees.....................................................................8
5.6 Financial Statements..............................................................8
5.7 Subsidiaries......................................................................9
5.8 Title to Assets...................................................................9
5.9 Events Subsequent to Most Recent Fiscal Period End................................9
5.10 Undisclosed Liabilities..........................................................11
5.11 Legal Compliance.................................................................12
5.12 Tax Matters......................................................................12
5.13 Properties.......................................................................13
5.14 Intellectual Property............................................................14
5.15 Tangible Assets..................................................................15
5.16 Inventory........................................................................15
5.17 Contracts........................................................................15
5.18 Notes and Accounts Receivable....................................................17
5.19 Power of Attorney................................................................17
5.20 Insurance........................................................................17
5.21 Litigation.......................................................................17
5.22 Product Warranty.................................................................17
5.23 Product Liability................................................................18
5.24 Employees........................................................................18
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
5.25 Employee Benefits................................................................18
5.26 Guaranties.......................................................................20
5.27 Environment, Health, and Safety..................................................20
5.28 Certain Business Relationships With Chip & Chip .................................21
5.29 No Adverse Developments..........................................................22
5.30 Full Disclosure..................................................................22
6. Representations and Warranties of Aspec.................................................22
6.1 Organization, Qualification, and Corporate Power.................................22
6.2 Authorization....................................................................22
6.3 Capitalization...................................................................23
6.4 Noncontravention.................................................................23
6.5 Brokers' Fees....................................................................23
6.6 SEC Filings......................................................................23
6.7 Financial Statements.............................................................24
6.8 Litigation.......................................................................24
6.9 No Adverse Developments..........................................................24
7. Pre-Closing Covenants...................................................................24
7.1 General..........................................................................24
7.2 Notices and Consents.............................................................25
7.3 Conduct of Business..............................................................25
7.4 Preservation of Business.........................................................25
7.5 Access to Information............................................................25
7.6 Notice of Developments...........................................................25
7.7 Exclusivity......................................................................26
8. Post-Closing Covenants..................................................................27
8.1 General..........................................................................27
8.2 Litigation Support...............................................................27
8.3 Transition.......................................................................27
8.4 Confidentiality..................................................................27
8.5 Chip & Chip Employees; Employee Stock Options....................................28
9. Conditions to Obligations to Close......................................................28
9.1 Conditions to Aspec's Obligation to Close........................................28
9.2 Conditions to Chip & Chip's Obligation .........................................29
10. Survival of Representations, Indemnification............................................30
10.1 Limited Survival of Representations and Warranties...............................30
10.2 Indemnification by Aspec.........................................................30
10.3 Indemnification by Majority Shareholders.........................................31
10.4 Notice of Claims.................................................................31
10.5 Third Party Claims...............................................................32
10.6 Limitation of Claims.............................................................32
11. Termination.............................................................................32
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
11.1 Termination of the Agreement.....................................................32
11.2 Effect of Termination............................................................33
12. Miscellaneous...........................................................................33
12.1 Publicity........................................................................33
12.2 No Third-Party Beneficiaries.....................................................33
12.3 Entire Agreement.................................................................34
12.4 Succession and Assignment........................................................34
12.5 Counterparts.....................................................................34
12.6 Headings.........................................................................34
12.7 Notices..........................................................................34
12.8 Governing Law; Dispute Resolution................................................35
12.9 Amendments and Waivers...........................................................36
12.10 Severability.....................................................................36
12.11 Expenses.........................................................................36
12.12 Construction.....................................................................36
12.13 Incorporation of Exhibits and Schedules..........................................37
</TABLE>
EXHIBITS
Exhibit A Certificate of Merger
Exhibit B List of Chip & Chip shareholders
Exhibit C Chip & Chip Disclosure Schedule
Exhibit D Aspec Disclosure Schedule
Exhibit E Opinion of Counsel for Chip & Chip and Majority Shareholders
Exhibit F Opinion of Counsel for Aspec
<PAGE> 5
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "AGREEMENT") is entered
into as of July 30, 1999, by and among Aspec Technology, Inc., a Delaware
corporation ("ASPEC"), Aspec Acquisition Corporation, a California corporation
and a wholly-owned subsidiary of Aspec ("MERGER SUB"), Chip & Chip , Inc., a
California corporation ("CHIP & CHIP"), and Wai-Yan Ho and Chong-Ming Lin
(collectively, the "MAJORITY SHAREHOLDERS"). Aspec, Merger Sub, Chip & Chip and
the Majority Shareholders are sometimes referred to herein individually as a
"PARTY" and collectively as the "PARTIES."
RECITALS
A. Pursuant to a Certificate of Merger (together with any Articles of
Merger required by the CBCA) providing for the merger of Merger Sub with and
into Chip & Chip pursuant to the California Business Corporation Act (the
"CBCA") and the Delaware General Corporation Law (the "DGCL"), the shares of
Common Stock of Chip & Chip, no par value, issued and outstanding immediately
prior to the effective time of the Merger will be converted into an aggregate of
2,000,000 shares of Common Stock of Aspec and $800,000 cash, and Chip & Chip
will become a wholly-owned subsidiary of Aspec.
B. The Parties desire to enter into this Agreement for the purpose of
setting forth certain representations, warranties and covenants made by each to
the other as an inducement to the execution and delivery of this Agreement, and
to serve as conditions precedent to the consummation of the merger of Merger Sub
with and into Chip & Chip.
C. The respective Boards of Directors of Aspec and Chip & Chip have
approved and adopted this Agreement, and the Agreement is intended to be a plan
of reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements, representations, warranties and covenants herein contained, the
parties hereto do hereby agree as follows:
AGREEMENT
1. Certain Definitions. As used in this Agreement, the following terms
have the following meanings (terms defined in the singular to have a correlative
meaning when used in the plural and vice versa). Certain other terms are defined
in the text of this Agreement.
"AFFILIATE" of a Person means any other Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with such Person.
"BUSINESS CONDITION" means the business, financial condition,
results of operations and assets of such corporate entity.
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"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation, retirement plan, severance plan or similar plan or arrangement;
(b) Employee Pension Benefit Plan; (c) Employee Welfare Benefit Plan; and (d)
any other nonqualified plan providing welfare benefits, including but not
limited to medical, dental, life insurance and disability benefits.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in
ERISA Sec. 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in
ERISA Sec. 3(1).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"GROSS NEGLIGENCE" consists of an intentional act, or the failure
to perform a duty, with reckless disregard for the consequences of such act or
failure.
"INTELLECTUAL PROPERTY" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof, (b)
all trademarks, service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, drawings, specifications, customer and supplier lists,
pricing and cost information, financial information, and business and marketing
plans and proposals), (e) all computer software (including data and related
documentation), (f) all other proprietary rights, and (g) all copies and
tangible embodiments thereof (in whatever form or medium).
"LOSSES" shall mean any and all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs,
reasonable amounts paid in settlement, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including court costs and reasonable attorneys' fees
and expenses in connection with any action, suit or proceeding to the extent of
the amount of such actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, reasonable amounts paid in
settlement, liabilities, obligations, taxes, liens, losses, expenses or fees.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on
the Business Condition of the corporate entity and its subsidiaries.
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Sec.
3(37) and Code Sec. 414(f).
"CHIP & CHIP SHAREHOLDERS" shall mean the shareholders of record
of Chip & Chip immediately prior to the Effective Time of the Merger.
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"ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency).
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"SECURITY INTEREST" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and payable,
(c) purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
2. The Merger.
2.1 Merger; Effective Time of the Merger. Subject to the terms
and conditions of this Agreement, Merger Sub will be merged with and into Chip &
Chip (the "MERGER") in accordance with the CBCA and the DGCL, and, as a result,
Chip & Chip will become a wholly-owned subsidiary of Aspec. In accordance with
the provisions of this Agreement, a Certificate of Merger in the form attached
hereto as Exhibit A shall be filed with the Delaware Secretary of State in
accordance with the DGCL and such Certificate of Merger (or, to the extent
required by the CBCA, Articles of Merger in form and substance mutually
acceptable to counsel for Chip & Chip and counsel for Aspec) shall be filed with
the California Secretary of State in accordance with the CBCA on the Closing
Date (as defined in Section 2.2) and each issued and outstanding share of Common
Stock, no par value, of Chip & Chip ("CHIP & CHIP COMMON STOCK") shall be
converted into a fraction of a share of Common Stock, $0.001 par value, of Aspec
("ASPEC COMMON STOCK") in the manner contemplated by Section 3. The Merger shall
become effective at the time of the filing of the Merger Agreement with the
California Secretary of State and the Delaware Secretary of State (the date of
such filing being hereinafter referred to as the "EFFECTIVE DATE OF THE MERGER"
and the time of such filing being hereinafter referred to as the "EFFECTIVE TIME
OF THE MERGER").
2.2 Closing. The closing of the Merger (the "CLOSING") will take
place as soon as practicable after satisfaction or waiver of the latest to occur
of the conditions set forth in Section 9 (the "CLOSING DATE"), at the offices of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road,
Palo Alto, California 94304-1050, or such other place as determined by the
parties.
2.3 Effect of the Merger. At the Effective Time of the Merger,
(i) the separate existence of Merger Sub shall cease and Merger Sub shall be
merged with and into Chip & Chip (Merger Sub and Chip & Chip are sometimes
referred to herein as the "CONSTITUENT CORPORATIONS" and Chip & Chip after the
Merger is sometimes referred to herein as the "SURVIVING CORPORATION"), (ii) the
Articles of Incorporation of Merger Sub shall be the Certificate of
Incorporation of the Surviving Corporation, (iii) the Bylaws of Merger Sub shall
be the Bylaws of the Surviving Corporation, (iv) the directors of Merger Sub
shall be the directors of the Surviving Corporation and
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(v) the Merger shall, from and after the Effective Time of the Merger, have all
the effects provided by applicable law.
2.4 Tax-Free Reorganization. The Merger is intended to qualify as
a tax free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "CODE").
2.5 Chip & Chip Stock Options and Convertible Securities. On or
prior to the Effective Time of the Merger, all outstanding options, warrants and
convertible securities of Chip & Chip shall terminate unless otherwise exercised
prior to such time. All current outstanding options, warrants and convertible
securities of Chip & Chip are listed in the Chip & Chip Disclosure schedule.
3. Effect of Merger on the Capital Stock of Chip & Chip; Exchange of
Certificates
3.1 Exchange of Stock and Cash Consideration. As of the Effective
Time of the Merger, each share of Chip & Chip Common Stock that is issued and
outstanding immediately prior to the Effective Time of the Merger as provided
for in Section 3.2 below), shall, by virtue of the Merger and without any action
on the part of Chip & Chip Shareholders, be converted into (i) shares of Aspec
Common Stock, and (ii) cash payment determined by dividing 2,800,000 by the
aggregate number of shares of Chip & Chip Common Stock (the "EXCHANGE RATIO")
issued and outstanding immediately prior to the Effective Time of the Merger
(including any shares issued upon the exercise of outstanding Chip & Chip
options or Chip & Chip convertible securities and any Dissenting Shares).
Attached as Exhibit B is a Chip & Chip shareholder list showing the shares of
Aspec Common Stock and cash to be exchanged for the shares of Chip & Chip Common
Stock held by each Chip & Chip Shareholder.
3.2 Fractional Shares. No fractional shares of Aspec Common Stock
shall be issued in the Merger. In lieu thereof, each holder of shares of Chip &
Chip Common Stock who would otherwise be entitled to receive a fraction of a
share of Aspec Common Stock shall receive from Aspec an amount of cash (rounded
to the nearest whole cent) equal to the product of the fraction of a share of
Aspec Common Stock to which such holder would otherwise be entitled, multiplied
by $1.00. For the purpose of determining fractional shares, all shares of Aspec
Common Stock to be issued to any Chip & Chip shareholder shall be aggregated.
3.3 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, Aspec shall
appoint itself or ChaseMellon Shareholder Services, L.L.C. to act as the
exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) Aspec to Provide Aspec Common Stock. Promptly after the
Effective Date of the Merger, Aspec shall make available for exchange in
accordance with this Section 3, through such reasonable procedures as Aspec may
adopt, the shares of Aspec Common Stock issuable pursuant to Section 3.1 in
exchange for outstanding shares of Chip & Chip Common Stock.
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(c) Exchange Procedures. Within ten (10) days after the
Effective Date of the Merger, the Exchange Agent shall mail to each holder of
record of a certificate or certificates which immediately prior to the Effective
Date of the Merger represented outstanding shares of Chip & Chip Common Stock
(the "CERTIFICATES") whose shares are being converted into shares of Aspec
Common Stock pursuant to Section 3.1 hereof (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and which shall be in such form and have such other provisions as Aspec
may reasonably specify, including appropriate investment representations to be
made by each such shareholder) (the "LETTER OF TRANSMITTAL") and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for shares of Aspec Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Aspec, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor the
number of shares of Aspec Common Stock to which the holder of Chip & Chip Common
Stock is entitled pursuant to Section 3.1 hereof. The Certificate so surrendered
shall forthwith be canceled. No interest will accrue or be paid to the holder of
any outstanding Chip & Chip Common Stock. From and after the Effective Date of
the Merger, until surrendered as contemplated by this Section 3.4, each
Certificate shall be deemed for all corporate purposes to evidence the number of
shares of Aspec Common Stock into which the shares of Chip & Chip Common Stock
represented by such Certificate have been converted. Notwithstanding the
foregoing procedures, Aspec shall use its reasonable efforts to provide the form
of Letter of Transmittal to Chip & Chip as soon as practical after the date
hereof, and Chip & Chip shall provide such Letter of Transmittal to each Chip &
Chip shareholder. The parties agree that in the event Aspec makes such Letter of
Transmittal available to Chip & Chip, any Exchange Agent shall not be obligated
to mail such Letter of Transmittal to the Chip & Chip shareholders.
(d) No Further Ownership Rights in Capital Stock of Chip &
Chip . The shares of Aspec Common Stock delivered upon the surrender for
exchange of shares of Chip & Chip Common Stock in accordance with the terms
hereof shall be deemed to have been delivered in full satisfaction of all rights
pertaining to such Chip & Chip Common Stock. There shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of Chip & Chip Common Stock which were outstanding immediately prior
to the Effective Date of the Merger. If, after the Effective Date of the Merger,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Section 3.3, provided that
the presenting holder is listed on Chip & Chip's shareholder list as a holder
of Chip & Chip Common Stock.
3.4 Taking of Necessary Action; Further Action. Aspec, Merger
Sub, Chip & Chip and the Majority Shareholders shall take all such actions as
may be necessary or appropriate in order to effect the Merger as promptly as
possible. If, at any time after the Effective Date of the Merger, any further
action is necessary or desirable to carry out the purposes of this Agreement and
to vest the Surviving Corporation with full right, title and possession to all
assets, property, rights, privileges, powers and franchises of Chip & Chip, the
officers and directors of the Surviving
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<PAGE> 10
Corporation are fully authorized in the name of the corporation or otherwise to
take, and shall take, all such action.
4. Securities Act Compliance.
4.1 Securities Act Exemption. The issuance of the Aspec Common
Stock in the Merger shall not be registered under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), in reliance upon Section 4(2) and/or Regulation
D of the Securities Act.
4.2 Stock Restrictions. The certificates representing the shares
of Aspec Common Stock issued pursuant to this Agreement shall bear a restrictive
legend (and stop transfer orders shall be placed against the transfer thereof
with Aspec's transfer agent), stating substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT (I)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO, (II) IN COMPLIANCE WITH RULE 144 OR (III)
PURSUANT TO AN OPINION OF COUNSEL FOR ASPEC THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933."
5. Representations and Warranties of Chip & Chip and the Majority
Shareholders. Chip & Chip and, to their respective knowledge, each of the
Majority Shareholders severally and not jointly represents and warrants to Aspec
and Merger Sub that the statements contained in this Section 5 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 5), except as
set forth in the disclosure schedule delivered by Chip & Chip to Aspec on the
date hereof (and initialed by Aspec), a copy of which is attached hereto as
Exhibit C (referred to herein as the "CHIP & CHIP DISCLOSURE SCHEDULE"). The
Chip & Chip Disclosure Schedule will be arranged in paragraphs corresponding to
the lettered and numbered paragraphs contained in this Section 5.
5.1 Organization, Qualification, and Corporate Power. Chip & Chip
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of California. Chip & Chip is duly authorized to conduct
business and is in good standing under the laws of each other jurisdiction where
such qualification is required. There is no state, other than California, in
which Chip & Chip owns any property or in which it has any employees, offices or
operations. Chip & Chip has full corporate power and authority, and has all
necessary and material licenses and permits, to carry on the businesses in which
it is engaged and to own and use the properties owned and used by it. Section 5
of the Chip & Chip Disclosure Schedule lists the
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directors and officers of Chip & Chip. The operations now being conducted by
Chip & Chip have not been conducted under any other name during the past five
(5) years.
5.2 Authorization. Chip & Chip has full power and authority to
execute and deliver this Agreement and the Merger Agreement, and, subject to
receipt of the requisite approval of its shareholders, to consummate the
transactions contemplated hereunder and to perform its obligations hereunder and
no other proceedings on the part of Chip & Chip are necessary to authorize the
execution, delivery and performance of this Agreement and the Merger Agreement.
This Agreement and the Merger Agreement and the transactions contemplated
thereby have been approved by the Chip & Chip's Board of Directors and
Shareholders. This Agreement and the Merger Agreement constitute the valid and
legally binding obligations of Chip & Chip, enforceable against Chip & Chip in
accordance with their respective terms and conditions. Chip & Chip need not give
any notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
5.3 Capitalization.
(a) Capital Stock. As of the date of this Agreement, the
entire authorized capital stock of Chip & Chip consists of 5,000,000 shares of
Common Stock, 4,978,857 of which are issued and outstanding. In addition no
stock options are currently outstanding and all options have been exercised or
terminated. All of the issued and outstanding shares of capital stock have been
duly authorized, are validly issued, fully paid, and non-assessable, and are
held of record by the respective shareholders as set forth in Section 5.3(a) of
the Chip & Chip Disclosure Schedule. All of the outstanding shares of capital
stock have been offered, issued and sold by Chip & Chip in compliance with
applicable Federal and state securities laws. As of the Closing Date, the entire
authorized capital stock of Chip & Chip shall consist of 5,000,000 shares of
Common Stock, 4,978,857 of which shall be issued and outstanding. As of the
Closing Date, all of the then issued and outstanding shares of capital stock
shall have been duly authorized, shall be validly issued, fully paid, and
non-assessable, and shall be held of record by the respective shareholders as
set forth in Section 5.3(a) of the Chip & Chip Disclosure Schedule. As of the
Closing Date, all of the then outstanding shares of capital stock shall have
been offered, issued and sold by Chip & Chip in compliance with applicable
Federal and state securities laws.
(b) No Other Rights or Agreements. As of the date of this
Agreement, Section 5.3(b) of the Chip & Chip Disclosure Schedule lists all of
the holders of options, warrants, purchase rights, subscription rights,
conversion rights, convertible debentures or other securities, exchange rights
and other rights that could require Chip & Chip to issue, sell or otherwise
cause to become outstanding any of its capital stock (the "STOCK RIGHTS"), and
the number of shares of Chip & Chip Common Stock subject to such Stock Rights.
Except as set forth in Section 5.3(b) of the Chip & Chip Disclosure Schedule,
there are no other outstanding or authorized Stock Rights. Except as set forth
in Section 5.3(b) of the Chip & Chip Disclosure Schedule, there are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Chip & Chip. Other than as
contemplated by Section 7.9 hereof, there are no voting trusts, proxies, or
other agreements or understandings with respect to the voting of the capital
stock
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of Chip & Chip. All of the Chip & Chip Stock Rights will be fully exercised or
canceled prior to the Effective Time of the Merger. As of the Effective Time of
the Merger, there will be (i) no outstanding or authorized Stock Rights, (ii) no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Chip & Chip and (iii) no voting
trusts, proxies, or other agreements or understandings with respect to the
voting of the capital stock of Chip & Chip (other than as contemplated by
Section 7.9 hereof).
5.4 Noncontravention. Neither the execution and the delivery of
this Agreement by Chip & Chip nor the consummation by Chip & Chip of the
transactions contemplated hereby, will (A) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which Chip &
Chip is subject or any provision of its Articles of Incorporation or bylaws, or
(B) (i) conflict with, (ii) result in a breach of, (iii) constitute a default
under, (iv) result in the acceleration of, (v) create in any party the right to
accelerate, terminate, modify, or cancel, or (vi) except as set forth in Section
5.4 of the Chip & Chip Disclosure Schedule, require any notice under, any
agreement, contract, lease, license, instrument, franchise permit or other
arrangement to which Chip & Chip is a party or by which it is bound or to which
any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets).
5.5 Broker's Fees. Neither Chip & Chip nor any of the Majority
Shareholders has any liability or obligation to pay any fees or commissions to
any broker, finder or agent with respect to the transactions contemplated by
this Agreement.
5.6 Financial Statements. Section 5.6 of the Chip & Chip
Disclosure Schedule contains the following financial statements (collectively
the "FINANCIAL Statements"): (i) unaudited balance sheets and statements of
income and cash flows as of and for the fiscal year ended December 31, 1998 (the
"MOST RECENT FISCAL YEAR END") for Chip & Chip; and (ii) an unaudited balance
sheet and statements of income and cash flows (the "MOST RECENT FINANCIAL
STATEMENTS") as of and for the fiscal period ended March 31, 1999 and June 30,
1999 (the "MOST RECENT FISCAL PERIOD ENDS") for Chip & Chip. The Financial
Statements (including the notes thereto) have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods covered thereby and present fairly the financial
condition of Chip & Chip as of such dates and the results of operations of Chip
& Chip for such periods; provided, however, that the Most Recent Financial
Statements lack footnotes and certain other presentation items and are subject
to normal year end adjustments. Except as set forth in Section 5.6 of the Chip &
Chip Disclosure Schedule, the books of account of Chip & Chip reflect as of the
dates shown thereon all items of income and expenses, and all assets,
liabilities and accruals of Chip & Chip required to be reflected therein, in
accordance with generally accepted accounting principles consistently applied.
Aspec shall assume $350,000 of Chip & Chip liabilities and all other
liabilities, debts and expenses of Chip & Chip shall be paid in full on or prior
to Closing.
5.7 Subsidiaries. Chip & Chip has no subsidiaries and has not
been a subsidiary of another company.
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5.8 Title to Assets. Chip & Chip has good and marketable title
to, or a valid leasehold interest in, the properties and assets (including,
without limitation, all Intellectual Property) used by it, located on its
premises, or shown on the balance sheet contained within the Most Recent
Financial Statements (the "MOST RECENT BALANCE SHEET") or acquired after the
date thereof, free and clear of all Security Interests, except for properties
and assets disposed of in the Ordinary Course of Business since the date of the
Most Recent Balance Sheet and except as set forth in Section 5.8 of the Chip &
Chip Disclosure Schedule. No Person other than Chip & Chip will own at the time
of the Closing any assets or properties currently utilized in or necessary to
the operations or business of Chip & Chip or situated on any of the premises of
Chip & Chip. There are no existing contracts, agreements, commitments or
arrangements with any Person to acquire any of the assets or properties of Chip
& Chip (or any interest therein) except for this Agreement.
5.9 Events Subsequent to Most Recent Fiscal Period End. Since the
Most Recent Fiscal Period End, there has not been any material adverse change in
the Business Condition of Chip & Chip. Without limiting the generality of the
foregoing, since that date:
(a) Chip & Chip has not sold, leased, transferred, or
assigned any assets or properties, tangible or intangible, outside the Ordinary
Course of Business;
(b) except for those agreements, contracts, leases and
commitments identified in Section 5.17 of the Chip & Chip Disclosure Schedule,
Chip & Chip has not entered into, assumed or become bound under or obligated by
any agreement, contract, lease or commitment (collectively a "CHIP & CHIP
AGREEMENT") or extended or modified the terms of any Chip & Chip Agreement which
(i) involves the payment of greater than $10,000 per annum or which extends for
more than one (1) year, (ii) involves any payment or obligation to any Affiliate
of Chip & Chip other than in the Ordinary Course of Business, (iii) involves the
sale of any material assets, (iv) involves any OEM relationship, or (v) involves
any license of Chip & Chip's technology;
(c) to the knowledge of Chip & Chip, no party (including
Chip & Chip) has accelerated, terminated, made modifications to, or canceled any
agreement, contract, lease, or license to which Chip & Chip is a party or by
which it is bound and Chip & Chip has not modified, canceled or waived or
settled any debts or claims held by it, outside the Ordinary Course of Business,
or waived or settled any rights or claims of a substantial value, whether or not
in the Ordinary Course of Business;
(d) none of the assets of Chip & Chip, tangible or
intangible, has become subject to any Security Interest, except as set forth on
Section 5.8 of the Chip & Chip Disclosure Schedule;
(e) Chip & Chip has not made any capital expenditures except
in the Ordinary Course of Business and not exceeding $10,000 in the aggregate of
all such capital expenditures;
(f) Chip & Chip has not made any capital investment in, or
any loan to, any other Person;
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(g) Chip & Chip has not created, incurred, assumed, prepaid
or guaranteed any indebtedness for borrowed money and capitalized lease
obligations, or extended or modified any existing indebtedness, except as
provided in Section 9.1(i) hereof; except that Aspec shall assume $350,000 of
Chip & Chip liabilities and all other liabilities, debts and expenses of Chip &
Chip shall be paid in full on or prior to Closing;
(h) Chip & Chip has not granted any license or sublicense of
any rights under or with respect to any Intellectual Property;
(i) there has been no change made or authorized in the
Articles of Incorporation or bylaws of Chip & Chip;
(j) Chip & Chip has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or other rights
to purchase or obtain (except upon the conversion, exchange or exercise of any
such securities which are described on Section 5.3 of the Chip & Chip Disclosure
Schedule) any of its capital stock;
(k) Chip & Chip has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock (whether in
cash or in kind) or redeemed, purchased, or otherwise acquired any of its
capital stock (other than with respect to any Dissenting Shares (as defined
herein));
(l) Chip & Chip has not experienced any damage, destruction,
or loss (whether or not covered by insurance) to its property in excess of
$10,000 in the aggregate of all such damage, destruction and losses;
(m) Chip & Chip has not suffered any repeated, recurring or
prolonged shortage, cessation or interruption of inventory shipments, supplies
or utility services;
(n) Chip & Chip has not made any loan to, or entered into
any other transaction with, or paid any bonuses in excess of an aggregate of
$10,000 to, any of its Affiliates, directors, officers, or employees or their
Affiliates, and, in any event, any such transaction was on fair and reasonable
terms no less favorable to Chip & Chip than would be obtained in a comparable
arm's length transaction with a Person which is not such a director, officer or
employee or Affiliate thereof;
(o) Chip & Chip has not entered into any employment contract
or collective bargaining agreement, written or oral, or modified the terms of
any existing such contract or agreement;
(p) Chip & Chip has not granted any increase in the base
compensation of any of its directors or officers, or, except in the Ordinary
Course of Business, any of its employees;
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(q) Chip & Chip has not adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or other plan,
contract, or commitment for the benefit of any of its directors, officers, or
employees (or taken any such action with respect to any other Employee Benefit
Plan);
(r) Chip & Chip has not made any other change in employment
terms for any of its directors or officers, and Chip & Chip has not made any
other change in employment terms for any other employees outside the Ordinary
Course of Business;
(s) Chip & Chip has not suffered any material adverse change
or any threat of any material adverse change in its relations with, or any loss
or threat of loss of, any of its major customers, distributors or dealers;
(t) Chip & Chip has not suffered any material adverse change
or any threat of any material adverse change in its relations with, or any loss
or threat of loss of, any of it major suppliers;
(u) Chip & Chip has not received notice or had knowledge of
any actual or threatened labor trouble or strike, or any other occurrence, event
or condition of a similar character;
(v) Chip & Chip has not changed any of the accounting
principles followed by it or the method of applying such principles, except as
described on Schedule 5.6 of the Chip & Chip Disclosure Schedule;
(w) Chip & Chip has not made a change in any of its banking
or safe deposit arrangements;
(x) Chip & Chip has not entered into any transaction other
than in the Ordinary Course of Business; and
(y) Chip & Chip has not committed to any of the foregoing.
5.10 Undisclosed Liabilities. Chip & Chip has no material
liability (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due, including any liability for
taxes) of a character which, under GAAP, should be accrued, shown or disclosed
on a balance sheet of Chip & Chip, except for (i) liabilities set forth on the
Most Recent Balance Sheet and (ii) liabilities which have arisen after the Most
Recent Fiscal Period End in the Ordinary Course of Business.
5.11 Legal Compliance. Chip & Chip has complied in all material
respects with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof). To
the knowledge of Chip & Chip, no action, suit, proceeding, hearing,
investigation,
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charge, complaint, claim, demand, notice or inquiry has been filed or commenced
by or against, or received by, any governmental body alleging any failure to so
comply. Chip & Chip has all licenses, permits, approvals, registrations,
qualifications, certificates and other governmental authorizations that are
necessary for the operations of Chip & Chip as they are presently conducted,
except for any such licenses, permits, approvals, registrations, qualifications,
certificates and other governmental authorizations which, if not obtained, would
not individually or in the aggregate be likely to result Material Adverse Effect
on Chip & Chip.
5.12 Tax Matters.
(a) For purposes of this Agreement, "TAXES" means all
federal, state, municipal, local or foreign income, gross receipts, windfall
profits, severance, property, production, sales, use, value added, license,
excise, franchise, employment, withholding, capital stock, levies, imposts,
duties, transfer and registration fees or similar taxes or charges imposed on
the income, payroll, properties or operations of Chip & Chip, together with any
interest, additions or penalties, deficiencies or assessments with respect
thereto and any interest in respect of such additions or penalties.
(b) Chip & Chip has filed all reports and returns with
respect to any Taxes ("TAX RETURNS") that it was required to file. All such Tax
Returns were correct and complete in all material respects, and no such Tax
Returns are currently the subject of audit. All Taxes owed by Chip & Chip
(whether or not shown on any Tax Return) were paid in full when due or are being
contested in good faith and are supported by adequate reserves on the Most
Recent Financial Statements, except any state Taxes (other than California
related Taxes) which are not individually or in the aggregate material to Chip &
Chip. Chip & Chip has provided adequate reserves on its Financial Statements
for the payment of any taxes accrued but not yet due and payable. Chip & Chip is
not currently the beneficiary of any extension of time within which to file any
Tax Return, and Chip & Chip has not waived any statute of limitations in respect
of Taxes or agreed to any extension of time with respect to any Tax assessment
or deficiency.
(c) There is no dispute or claim concerning any Tax
liability of Chip & Chip either (A) claimed or raised by any authority in
writing or (B) based upon personal contact with any agent of such authority.
There are no tax liens of any kind upon any property or assets of Chip & Chip,
except for inchoate liens for taxes not yet due and payable.
(d) Chip & Chip has not filed a consent under Sec. 341(f) of
the Internal Revenue Code of 1986, as amended (the "CODE") concerning
collapsible corporations. Chip & Chip has not made any payments, is not
obligated to make any payments, and is not a party to any agreement that under
any circumstances could obligate it to make any payments as a result of the
consummation of the Merger that will not be deductible under Code Sec. 280G.
Chip & Chip has not been a United States real property holding corporation
within the meaning of Code Sec. 897(c)(2) during the applicable period specified
in Code Sec. 897(c)(1)(A)(ii). Chip & Chip is not a party to any tax allocation
or sharing agreement. Chip & Chip (A) has not been a member of any affiliated
group within the meaning of Code Sec. 1504 or any similar group defined under a
similar provision of state, local, or foreign law (an "AFFILIATED GROUP") filing
a consolidated federal
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Income Tax Return and (B) has no any liability for the taxes of any Person under
Treas. Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
(e) The unpaid Taxes of Chip & Chip (A) did not, as of the
Most Recent Fiscal Period End, exceed by any amount the reserve for Tax
liability (other than any reserve for deferred taxes established to reflect
timing differences between book and tax income) set forth on the face of the
Most Recent Balance Sheet (rather than in any notes thereto) and (B) will not
exceed that reserve as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of Chip & Chip in
filing its Tax Returns.
5.13 Properties.
(a) Chip & Chip does not currently own and has never
previously owned any real property.
(b) Section 5.13 of the Chip & Chip Disclosure Schedule
lists and describes briefly all real property leased or subleased to Chip &
Chip. Chip & Chip has delivered to Aspec correct and complete copies of the
leases and subleases listed in Section 5.13 of the Chip & Chip Disclosure
Schedule (as amended to date). With respect to each lease and sublease listed in
Section 5.13 of the Chip & Chip Disclosure Schedule to the knowledge of Chip &
Chip:
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect in all respects;
(ii) no party to the lease or sublease is in breach or
default, and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(iii) no party to the lease or sublease has repudiated
any provision thereof;
(iv) there are no disputes, oral agreements, or
forbearance programs in effect as to the lease or sublease:
(v) Chip & Chip has not assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold; and
(vi) all facilities leased or subleased thereunder have
received all approvals of governmental authorities (including licenses and
permits) required in connection with the operation thereof, and have been
operated and maintained in accordance with applicable laws, rules, and
regulations in all material respects.
5.14 Intellectual Property.
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(a) To the knowledge of Chip & Chip, Chip & Chip has not
interfered with, infringed upon, misappropriated or violated any Intellectual
Property rights of third parties. Chip & Chip has not received since its
inception any charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any claim
that Chip & Chip must license or refrain from using any Intellectual Property
rights of any third party), except as disclosed in Section 5.14 of the Chip &
Chip Disclosure Schedule. To the knowledge of Chip & Chip, no third party has
interfered with, infringed upon, misappropriated, or violated any Intellectual
Property rights of Chip & Chip. Each employee of Chip & Chip has signed an
invention assignment and/or confidentiality agreement with Chip & Chip that
provides that any Intellectual Property developed by such employee while
employed by Chip & Chip is the sole property of Chip & Chip.
(b) Section 5.14(b) of the Chip & Chip Disclosure Schedule
identifies (i) all Intellectual Property owned by Chip & Chip and (ii) each
patent or registration which has been issued to Chip & Chip or any Affiliate of
Chip & Chip with respect to any of the Intellectual Property used in Chip &
Chip's business, (iii) each pending patent application or application for
registration which Chip & Chip or any Affiliate of Chip & Chip has made with
respect to any of the Intellectual Property used in Chip & Chip's business, and
(iv) each material license, agreement, or other permission which Chip & Chip or
any Affiliate of Chip & Chip has granted to any third party with respect to any
of the Intellectual Property used in Chip & Chip's business (together with any
exceptions). Chip & Chip has delivered to Aspec correct and complete copies of
all such patents, registrations, applications, licenses, agreements, and
permissions (as amended to date). Section 5.14(b) of the Chip & Chip Disclosure
Schedule also identifies (i) each trade name or unregistered trademark used by
Chip & Chip or any Affiliate of Chip & Chip which is material to the business of
Chip & Chip and (ii) each unregistered copyright or trade secret owned by Chip &
Chip or any Affiliate of Chip & Chip with respect to Intellectual Property which
is material to the business of Chip & Chip . With respect to each item of
Intellectual Property required to be identified in Section 5.14(b) of the Chip &
Chip Disclosure Schedule, to the knowledge of Chip & Chip:
(i) Chip & Chip possesses all right, title, and
interest in and to the item, free and clear of any Security Interest (except as
disclosed in Section 5.8 of the Chip & Chip Disclosure Schedule), license or
other restriction;
(ii) the item is legal and valid and in full force and
effect and is not subject to any outstanding injunction, judgment, order,
decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to the
knowledge of Chip & Chip, threatened which challenges the legality, validity,
enforceability, use or ownership of the item; and
(iv) Chip & Chip has never agreed to indemnify any
Person for or against any interference, infringement, misappropriation, or other
conflict with respect to the item, except pursuant to the contracts set forth in
Section 5.17 of the Chip & Chip Disclosure Schedule.
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(c) Section 5.14(c) of the Chip & Chip Disclosure Schedule
identifies each material item of Intellectual Property that any third party owns
and that Chip & Chip uses pursuant to license, sublicense, agreement, or
permission. Chip & Chip has delivered to Aspec correct and complete copies of
all such licenses, sublicenses, agreements, and permissions (as amended to
date). With respect to each item of Intellectual Property required to be
identified in Section 5.14(c) of the Chip & Chip Disclosure Schedule, to the
knowledge of Chip & Chip:
(i) the license, sublicense, agreement or permission
covering the item is legal, valid, binding, enforceable, and in full force and
effect in all material respects;
(ii) no party to the license, sublicense, agreement, or
permission is in breach or default, and, to the knowledge of Chip & Chip, no
event has occurred which with notice or lapse of time would constitute a breach
or default or permit termination, modification or acceleration thereunder;
(iii) no party to the license, sublicense, agreement,
or permission has repudiated any provision thereof; and
(iv) Chip & Chip has not granted any sublicense or
similar right with respect to the license, sublicense, agreement, or permission.
5.15 Tangible Assets. The buildings, machinery, equipment, and
other tangible assets that Chip & Chip owns and leases are free from material
defects (patent and latent) and are in good operating condition and repair
(subject to normal wear and tear) and are usable in the Ordinary Course of
Business.
5.16 Inventory. In all material respects, all of the inventory of
Chip & Chip and any supplies, manufactured and processed parts, work in process
or finished goods, is usable, merchantable and fit for the purpose for which it
was procured or manufactured, and none of such inventory is slow-moving,
obsolete, damaged, or defective, subject to adjustments for operations and
transactions through the Closing Date in accordance with the past custom and
practice of Chip & Chip.
5.17 Contracts. Section 5.17 of the Chip & Chip Disclosure
Schedule lists the following contracts, agreements, commitments and other
arrangements to which Chip & Chip is a party or by which Chip & Chip or any of
its assets is bound:
(a) any agreement (or group of related agreements) for the
lease of personal property to or from any Person or license of any software or
Intellectual Property which involves the payment by or to Chip & Chip of more
than $10,000 per year;
(b) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or other
personal property, or for the furnishing or receipt of services, the performance
of which will extend over a period of more than one year or involve
consideration in excess of $10,000;
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(c) any agreement for the purchase of supplies, components,
products or services from single source suppliers, custom manufacturers or
subcontractors which involves the payment by Chip & Chip of more than $10,000
per year;
(d) any agreement concerning a partnership or joint venture;
(e) any agreement (or group of related agreements) under
which it has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money or any capitalized lease obligation in excess of $10,000 or under
which a Security Interest has been imposed on any of its assets, tangible or
intangible;
(f) any agreement concerning noncompetition or restraint of
trade or any agreement on currently active projects which involves
confidentiality;
(g) any agreement with any Chip & Chip shareholder or any of
such shareholder's Affiliates (other than Chip & Chip) or with any Affiliate of
Chip & Chip;
(h) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or arrangement for
the benefit of its current or former directors, officers or employees;
(i) any collective bargaining agreement;
(j) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis;
(k) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees;
(l) any agreement pursuant to which Chip & Chip is obligated
to provide services, maintenance, support or training which involves payments to
Chip & Chip of more than $50,000 per year;
(m) any standard form agreement used by Chip & Chip,
including, but not limited to, any purchase order, statement of standard terms
and conditions of sale, or employment offer letter; and
(n) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $10,000 or which is
expected to continue for more than six (6) months from the date hereof.
Chip & Chip has delivered to Aspec a correct and complete copy of each written
agreement listed in Section 5.17 of the Chip & Chip Disclosure Schedule (as
amended to date) and a written summary setting forth the terms and conditions of
each oral agreement referred to in Section 5.17 of the Chip
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& Chip Disclosure Schedule. With respect to each such agreement: (A) the
agreement is legal, valid, binding, enforceable, and in full force and effect in
all respects against Chip & Chip and, to the knowledge of Chip & Chip, the
other parties thereto; (B) Chip & Chip is not and, to the knowledge of Chip &
Chip, no other party is in breach or default, and no event has occurred, which
with notice or lapse of time would constitute a breach or default, or permit
termination, modification, or acceleration, under the agreement; (C) Chip & Chip
has not and, to the knowledge of Chip & Chip, no other party has repudiated any
provision of the agreement; and (D) Chip & Chip does not have any reason to
believe that the service called for thereunder cannot be supplied in accordance
with its terms and without resulting in a loss to any of Chip & Chip.
5.18 Notes and Accounts Receivable. All notes and accounts
receivable of Chip & Chip, all of which are reflected properly on the books and
records of Chip & Chip in all material respects, are, to the knowledge of Chip &
Chip, (i) valid receivables subject to no setoffs, defenses or counterclaims,
and are current and collectible, and (ii) will be collected in accordance with
their terms at their recorded amounts, subject only to adjustments for
operations and transactions through the Closing Date in accordance with the past
custom and practice of Chip & Chip.
5.19 Power of Attorney. There are no outstanding powers of
attorney executed on behalf of Chip & Chip.
5.20 Insurance. Chip & Chip has delivered to Aspec copies of each
insurance policy (including policies providing property, casualty, liability,
and workers' compensation coverage and bond and surety arrangements) with
respect to which Chip & Chip is a party, a named insured, or otherwise the
beneficiary of coverage. With respect to each such insurance policy: (A) the
policy is legal, valid, binding, enforceable, and in full force and effect (and
there has been no notice of cancellation or nonrenewal of the policy received)
with respect to Chip & Chip and, to the knowledge of Chip & Chip, the other
parties thereto; (B) neither Chip & Chip nor, to the knowledge of Chip & Chip,
any other party to the policy is in breach or default (including with respect to
the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the policy;
(C) neither Chip & Chip nor, to the knowledge of Chip & Chip, any other party
to the policy has repudiated any provision thereof; and (D) there has been no
failure by Chip & Chip to give any notice or present any claim under the policy
in due and timely fashion. Section 5.20 of the Chip & Chip Disclosure Schedule
describes any self-insurance arrangements presently maintained by Chip & Chip.
5.21 Litigation. Section 5.21 of the Chip & Chip Disclosure
Schedule sets forth each instance in which Chip & Chip (or any of its assets)
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party or, to the knowledge of Chip & Chip, is threatened
to be made a party, to any action, suit, proceeding, hearing, arbitration, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator. To the knowledge of Chip & Chip, there are no facts or
circumstances which would form the basis of any claim against Chip & Chip.
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5.22 Product Warranty. All of the services performed and products
licensed, manufactured, sold, leased, and delivered by Chip & Chip have
conformed in all material respects with all applicable contractual commitments
and all express and implied warranties, and, to the knowledge of Chip & Chip,
Chip & Chip has no liability (whether asserted or unasserted, whether absolute
or contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due) for replacement or repair thereof or other
damages in connection therewith, other than in the Ordinary Course of Business
in an aggregate amount not exceeding $10,000. Section 5.17(o) of the Chip & Chip
Disclosure Schedule includes copies of the standard terms and conditions of
license for Chip & Chip (containing applicable guaranty, warranty, and indemnity
provisions).
5.23 Product Liability. To the knowledge of Chip & Chip, Chip &
Chip has no material liability (whether asserted or unasserted, whether absolute
or contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due) arising out of any injury to individuals or
property as a result of the ownership, possession, or use of any product
licensed, manufactured, sold, leased, or delivered by Chip & Chip.
5.24 Employees. No executive, key employee, or significant group
of employees has advised any executive officer of Chip & Chip that he, she or
they plan to terminate employment with Chip & Chip during the next six (6)
months. Chip & Chip is not a party to or bound by any collective bargaining
agreement, nor has it experienced any strike or grievance, claim of unfair labor
practices, or other collective bargaining dispute. To the knowledge of Chip &
Chip, Chip & Chip has not committed any unfair labor practice. To the knowledge
of Chip & Chip, there is no organizational effort presently being made or
threatened by or on behalf of any labor union with respect to employees of Chip
& Chip.
5.25 Employee Benefits.
(a) Section 5.25(a) of the Chip & Chip Disclosure Schedule
lists each Employee Benefit Plan that Chip & Chip maintains or to which Chip &
Chip contributes or is obligated to contribute.
(i) Each such Employee Benefit Plan (and each related
trust, or fund established by Chip & Chip) complies in form and in operation in
all material respects with their terms, the applicable requirements of ERISA,
the Code, and other applicable laws.
(ii) All required reports and descriptions (including
Form 5500 Annual Reports, Summary Annual Reports, PBGC-1's, and Summary Plan
Descriptions) have been filed or distributed appropriately with respect to each
such Employee Benefit Plan. The requirements of Code Sec. 4980B have been met in
all material respects with respect to each such Employee Benefit Plan which is
an Employee Welfare Benefit Plan. No event has occurred and no condition exists
with respect to any Employee Benefit Plan that would subject Chip & Chip to any
tax under Code Sections 4972, 4976 or 4979 or to a fine under ERISA Sections
502(i) or 502(l).
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(iii) All contributions, premiums or other payments
(including all employer contributions and employee salary reduction
contributions) which are due have been paid to each Employee Benefit Plan and
all contributions, premiums or other payments for any period ending on or before
the Closing Date which are not yet due shall been paid to each such Employee
Benefit Plan or shall be accrued in accordance with the custom and practice of
Chip & Chip.
(iv) Each such Employee Benefit Plan which is an
Employee Pension Benefit Plan and which is intended to qualify under Code Sec.
401(a), has received a favorable determination letter from the Internal Revenue
Service with respect to the qualification of the plan under Code Section 401(a)
and the exemption of any corresponding trust under Code Section 501, unless the
Internal Revenue Service is deemed to have approved the form of such Plan under
applicable IRS Revenue Procedures. A copy of such determination letters have
been provided to Aspec and nothing has occurred since the date of each such
determination letter that would cause such Employee Pension Benefit Plan to lose
its ability to rely on such letter. Each Employee Pension Benefit Plan has been
restated to comply with the 1986 Tax Reform Act and subsequent applicable tax
legislation to the extent required by governing tax law. A copy of any
determination letters applicable to such restatement which have been received by
Chip & Chip has been provided to Aspec.
(v) Neither Chip & Chip nor any other Person or entity
under common control with Chip & Chip within the meaning of Section 414(b), (c)
or (m) of the Code and the regulations thereunder has now or at any previous
time, maintained, established, sponsored, participated in, or contributed to,
any Employee Pension Benefit Plan that is subject to Part 3 of Subtitle B of
Title I of ERISA, Title IV of ERISA or Section 412 of the Code. No Employee
Welfare Benefit Plan or other Employee Benefit Plan providing welfare benefits
is funded with a trust or other funding vehicle, other than insurance policies
or contracts with a health maintenance organization or similar health care
delivery entity.
(vi) Chip & Chip has delivered to Aspec correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, if any,
the most recent Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and other funding agreements which implement each
maintained Employee Benefit Plan. The terms of any such documentation or other
communication do not prohibit Aspec from amending or terminating any such
Employee Benefit Plan.
(b) With respect to each Employee Benefit Plan that Chip &
Chip, and/or any controlled group of corporations within the meaning of Code
Sec. 1563 (a "CONTROLLED GROUP OF CORPORATIONS") which includes Chip & Chip,
maintains or ever has maintained or to which any of them contributes, ever
contributed, or ever has been required to contribute:
(i) There have been no prohibited transactions within
the meaning of ERISA Sec 406 and Code Sec. 4975 with respect to any such
Employee Benefit Plan. No fiduciary within the meaning of ERISA Sec. 3(21) (a
"FIDUCIARY"), has any liability for breach of fiduciary duty or any other
failure to act or comply in connection with the administration or
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investment of the assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing, or investigation with respect to the administration or the
investment of the assets of any such Employee Benefit Plan (other than routine
claims for benefits) is pending or threatened.
(c) Except as disclosed in Schedule 5.25(c) of the Chip &
Chip Disclosure Schedule, Chip & Chip does not maintain or contribute to, has
never maintained or contributed to, and has never been required to contribute
to, any Employee Welfare Benefit Plan or any other Employee Benefit Plan
providing medical, health, or life insurance or other welfare-type benefits for
current or future retired or terminated employees, their spouses, or their
dependents (other than in accordance with Code Sec. 4980B or Part 6 of Subtitle
B of Title I of ERISA).
(d) There is no liability in connection with any Employee
Benefit Plan that is not fully disclosed or provided for on the Most Recent
Balance Sheet for which disclosure would be required under generally accepted
accounting principles.
(e) No Employee Benefit Plan or Chip & Chip has any
liability to any plan participant, beneficiary or other person by reason of the
payment of benefits or the failure to pay benefits with respect to benefits
under or in connection with any such Employee Benefit Plan, other than claims in
the normal administration of such plans.
5.26 Guaranties. Chip & Chip is not a guarantor or otherwise
responsible for any liability or obligation (including indebtedness) of any
other Person.
5.27 Environment, Health, and Safety.
(a) For purposes of this Agreement, the following terms have
the following meanings:
"ENVIRONMENTAL, HEALTH, AND SAFETY LAWS" means any and all
federal, state, local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, plans, injunctions, judgments, decrees, requirements or
rulings now or hereafter in effect, imposed by any governmental authority
regulating, relating to, or imposing liability or standards of conduct relating
to pollution or protection of the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
public health and safety, or employee health and safety, concerning any
Hazardous Materials or Extremely Hazardous Substances, as such terms as defined
herein, or otherwise regulated, under any Environmental, Health and Safety Laws.
The term "ENVIRONMENTAL, HEALTH AND SAFETY LAWS" shall include, without
limitation, the Clean Water Act (also known as the Federal Water Pollution
Control Act), 33 U.S.C. Section 1251 et seq., the Toxic Substances Control Act,
15 U.S.C. Section 2601 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et
seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section
136 et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986,
Public Law 99-4, 99, 100 Stat. 1613, the Emergency Planning and Community Right
to Know Act, 42 U.S.C. Section 11001 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq., and the Occupational Safety and
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Health Act, 29 U.S.C. Section 651 et seq., all as amended, together with any
amendments thereto, regulations promulgated thereunder and all substitutions
thereof.
"EXTREMELY HAZARDOUS SUBSTANCE" means a substance on the
list described in Section 302 (42 U.S.C. Section 11002(a)(2)) of the Emergency
Planning and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., as
amended.
"HAZARDOUS MATERIAL" means any material or substance that,
whether by its nature or use, is now or hereafter defined as a pollutant,
dangerous substance, toxic substance, hazardous waste, hazardous material,
hazardous substance or contaminant under any Environmental, Health and Safety
Laws, or which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and which is now or
hereafter regulated under any Environmental, Health and Safety Laws, or which is
or contains petroleum, gasoline, diesel fuel or other petroleum hydrocarbon
product.
(b) To the knowledge of Chip & Chip, each of Chip & Chip
and its predecessors and Affiliates (A) has complied with the Environmental,
Health, and Safety Laws (and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, directive or notice has been
filed or commenced against any of them alleging any such failure to comply), (B)
has obtained and been in substantial compliance with all of the terms and
conditions of all permits, licenses, certificates and other authorizations which
are required under the Environmental, Health, and Safety Laws, and (C) has
complied in all material respects with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules, and
timetables which are contained in the Environmental, Health, and Safety Laws.
(c) To the knowledge of Chip & Chip, Chip & Chip has no
liability (whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due), and none of Chip & Chip and its predecessors and
Affiliates has handled or disposed of any Hazardous Materials or extremely
Hazardous Substances, arranged for the disposal of any Hazardous Materials or
Extremely Hazardous Substances, exposed any employee or other individual to any
Hazardous Materials or Extremely Hazardous Substances, or owned or operated any
property or facility in any manner that could give rise to any liability, for
damage to any site, location, surface water, groundwater, land surface or
subsurface strata, for any illness of or personal injury to any employee or
other individual, or for any reason under any Environmental, Health, and Safety
Law.
(d) To the knowledge of Chip & Chip, no Extremely Hazardous
Substances are currently, or have been, located at, on, in, under or about all
properties and equipment used in the business of Chip & Chip and its
predecessors and Affiliates.
(e) To the knowledge of Chip & Chip, no Hazardous Materials
are currently located at, on, in, under or about all properties and equipment
used in the business of Chip & Chip and its predecessors and Affiliates in a
manner which violates any Environmental, Health and Safety Laws or which
requires cleanup or corrective action of any kind under any Environmental,
Health and Safety Laws.
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5.28 Certain Business Relationships With Chip & Chip. None of
the Majority Shareholders nor Chip & Chip nor any director or officer of Chip &
Chip, nor any member of their immediate families, nor any Affiliate of any of
the foregoing, owns, directly or indirectly, or has an ownership interest in any
business (corporate or otherwise) which is a party to, or in any property which
is the subject of, any business arrangement or relationship of any kind with
Chip & Chip.
5.29 No Adverse Developments. To the knowledge of Chip & Chip,
there is no development (exclusive of general economic factors affecting
business in general) or threatened development affecting Chip & Chip (or
affecting customers, suppliers, employees, and other Persons which have
relationships with Chip & Chip ) that (i) is having or is reasonably likely to
have a Material Adverse Effect on Chip & Chip, or (ii) would prevent Aspec from
conducting the business of the Surviving Corporation following the Closing in
the manner in which it was conducted or planned to be conducted by Chip & Chip
prior to the Closing.
5.30 Full Disclosure. No representation or warranty in this
Section 5 or in any document delivered by the Majority Shareholders or Chip &
Chip pursuant to the transactions contemplated by this Agreement, and no
statement, list, certificate or instrument furnished to Aspec pursuant hereto or
in connection with this Agreement, when taken as a whole, contains any untrue
statement of a material fact, or omits to state any fact necessary to make any
statement herein or therein not materially misleading. There is no fact,
development or threatened development (excluding general economic factors
affecting business in general) known to Chip & Chip or the Majority Shareholders
which Chip & Chip has not disclosed to Aspec and which is having or may have a
Material Adverse Effect on Chip & Chip. Chip & Chip has delivered to Aspec
true, correct and complete copies of all documents, including all amendments,
supplements and modifications thereof or waivers currently in effect thereunder,
described in the Chip & Chip Disclosure Schedule.
6. Representations and Warranties of Aspec. Aspec represents and
warrants to Chip & Chip that the statements contained in this Section 6 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 6),
except as set forth in the disclosure schedule delivered by Aspec to Chip & Chip
on the date hereof (and initialed by Aspec and Chip & Chip), a copy of which is
attached hereto as Exhibit D (referred to herein as the "ASPEC DISCLOSURE
SCHEDULE"). The Aspec Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered paragraphs contained in this Section 6.
6.31 Organization, Qualification, and Corporate Power. Aspec is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware. Aspec is duly authorized to conduct business and
is in good standing under the laws of each other jurisdiction where such
qualification is required. Aspec has full corporate power and authority, and has
all necessary and material licenses and permits, to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it.
6.32 Authorization. Aspec has full power and authority to execute
and deliver this Agreement and the Merger Agreement, and to consummate the
transactions contemplated hereunder and to perform its obligations hereunder and
no other proceedings on the part of Aspec is necessary
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to authorize the execution, delivery and performance of this Agreement and the
Merger Agreement. This Agreement and the Merger Agreement and the transactions
contemplated thereby have been approved by the unanimous vote of Aspec's Board
of Directors. This Agreement and the Merger Agreement constitute the valid and
legally binding obligations of Aspec enforceable against Aspec in accordance
with their respective terms and conditions. Aspec need not give any notice to,
make any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the transactions
contemplated by this Agreement.
6.33 Capitalization.
(a) As of May 31, 1999, the authorized capital stock of
Aspec consisted of (i) 75,000,000 shares of Common Stock, of which 28,066,000
shares were issued and outstanding, (iii) 5,000,000 shares of undesignated
preferred stock, none of which were issued and outstanding, and (iv) an
aggregate of approximately 2,773,150 shares were subject to outstanding options
or reserved for issuance pursuant to Aspec's employee and director stock plans.
All of the outstanding shares of Aspec's capital stock have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
this Section 6.3, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of Aspec or obligating Aspec to issue or sell any shares of
capital stock of, or other equity interests in, Aspec. The authorized capital
stock of Merger Sub consists of 1,000 shares of common stock , all of which are
held of record by Aspec.
(b) The shares of Aspec Common Stock to be issued pursuant
to Section 3.1 of this Agreement are duly authorized and reserved for issuance,
and upon issuance thereof will be validly issued, fully paid and nonassessable.
6.34 Noncontravention. Neither the execution and the delivery of
this Agreement nor the consummation of the transactions contemplated hereby,
will (A) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Aspec is subject or any provision of its
Certificate of Incorporation or bylaws, or (B) (i) conflict with, (ii) result in
a breach of, (iii) constitute a default under, (iv) result in the acceleration
of, (v) create in any party the right to accelerate, terminate, modify, or
cancel, or (vi) require any notice under, any agreement, contract, lease,
license, instrument, or other arrangement to which Aspec is a party or by which
it is bound or to which any of its assets is subject.
6.35 Brokers' Fees. Aspec has no liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
6.36 SEC Filings. ASPEC has filed all forms, reports and
documents required to be filed with the SEC since April 1, 1998, and has made
available to Chip & Chip such forms, reports and documents in the form filed
with the SEC. All such required forms, reports and documents (including those
that ASPEC may file subsequent to the date hereof) are referred to herein as the
"ASPEC SEC Reports". As of their respective dates, the ASPEC SEC Reports (i)
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were prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such ASPEC SEC Reports, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of ASPEC's
subsidiaries is required to file any forms, reports or other documents with the
SEC.
6.37 Financial Statements . Each of the consolidated financial
statements (including, in each case, any related notes thereto) contained in
ASPEC SEC Reports ( the "ASPEC Financials"), including any ASPEC SEC Reports
filed after the date hereof until the Closing, (i) was compiled as to form in
all material respects with the published rules and regulations of the SEC with
respect thereto, (ii) was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited interim financial statements, as
may be permitted by the SEC on Form 10-Q under the Exchange Act) and (iii)
fairly presented the consolidated financial position of ASPEC and it's
subsidiaries as at the respective dates thereof and the consolidated results of
ASPEC's operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments. The balance sheet of ASPEC contained in ASPEC
SEC Form 10Q Report as of May 31, 1999 is hereinafter referred to as the "ASPEC
Balance Sheet."
6.38 Litigation. Section 6.8 of the Aspec Disclosure Schedule
sets forth each instance in which Aspec (or any of its assets) (i) is subject to
any outstanding injunction, judgment, order, decree, ruling, or charge or (ii)
is a party or, to the knowledge of Aspec, is threatened to be made a party, to
any action, suit, proceeding, hearing, arbitration, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator.
6.9 No Adverse Developments. To the knowledge of Aspec, there is
no development (exclusive of general economic factors affecting business in
general) or threatened development affecting Aspec (or affecting customers,
suppliers, employees, and other Persons which have relationships with Aspec)
that (i) is having or is reasonably likely to have a Material Adverse Effect on
Aspec, or (ii) would prevent Aspec from conducting its business following the
Closing in the manner in which it was conducted or planned to be conducted by
Aspec prior to the Closing.
7. Pre-Closing Covenants. With respect to the period between the
execution of this Agreement and the earlier of the termination of this Agreement
in accordance with Section 11 hereof and the Effective Time of the Merger:
7.1 General. Each of the Parties will use their reasonable best
efforts to take all actions and to do all things necessary, proper, or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Section 9 below).
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7.2 Notices and Consents. Except as otherwise agreed to by Aspec,
Chip & Chip will give any notices to third parties and will use its best efforts
to obtain any third party consents that are required in connection with the
matters identified in Section 5.4 of the Chip & Chip Disclosure Schedule. Each
of the Parties will give any notices to, make any filings with, and use its best
efforts to obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters identified in Section 5.4
of the Chip & Chip Disclosure Schedule.
7.3 Conduct of Business. Chip & Chip will not engage in any
practice, take any action, or enter into any transaction outside the Ordinary
Course of Business. Without limiting the generality of the foregoing, Chip &
Chip will not (a) issue or sell, or contract to issue or sell, any shares of its
capital stock or that of any of its subsidiaries or any securities convertible
into to exchangeable for shares of capital stock of it or any of its
subsidiaries, or securities, warrants, options or rights to purchase any of the
foregoing (other than shares issued upon exercise of outstanding options or upon
the conversion of outstanding convertible securities described on the Chip &
Chip Disclosure Schedule), (b) purchase or redeem any shares of its capital
stock, (c) declare or pay any dividends or agree to make any other distribution
with respect to any shares of its capital stock, (d) amend its Articles of
Incorporation or Bylaws, or (e) enter into or propose to enter into an agreement
with any other person providing for the possible acquisition by it or any of its
subsidiaries (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) of any material portion of the capital stock or assets of
another entity. In addition, Chip & Chip will comply with all laws, statutes,
ordinances, rules, regulations and orders applicable to it or to the conduct of
its business, except for violations that could not subject Chip & Chip to a
penalty or loss that could constitute a Material Adverse Effect on Chip & Chip.
7.4 Preservation of Business. Chip & Chip will use its best
efforts to keep its business and properties substantially intact, including its
present operations, physical facilities, working conditions, and relationships
with lessors, licensors, suppliers, customers and employees. Aspec will use its
best efforts to keep its business and properties substantially intact, including
its present operations, physical facilities, working conditions, and
relationships with lessors, licensors, suppliers, customers and employees.
7.5 Access to Information. Chip & Chip will permit Aspec and its
representatives to have access at all reasonable times, and in a manner so as
not to interfere with the normal business operations of Chip & Chip, to the
business and operations of Chip & Chip. Neither such access, inspection and
furnishing of information to Aspec and its representatives, nor any
investigation by Aspec and its representatives, shall in any way diminish or
otherwise effect Aspec's right to rely on any representation or warranty made by
Chip & Chip or the Majority Shareholders hereunder. Aspec will permit Chip &
Chip and its representatives to have access at all reasonable times, and in a
manner so as not to interfere with the normal business operations of Aspec, to
the business and operations of Aspec. Neither such access, inspection and
furnishing of information to Chip & Chip and its representatives, nor any
investigation by Chip & Chip and its representatives, shall in any way diminish
or otherwise effect Chip & Chip 's right to rely on any representation or
warranty made by Aspec hereunder.
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7.6 Notice of Developments. Each Party will give prompt written
notice to the others of any adverse development causing a material breach of any
of its own representations and warranties in Section 5 or Section 6 above. No
disclosure by any Party pursuant to this Section 7.6, however, shall be deemed
to amend or supplement the Chip & Chip Disclosure Schedule or the Aspec
Disclosure Schedule or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant.
7.7 Exclusivity. From and after the date hereof through the date
which is thirty (30) days following the termination of this Agreement pursuant
to Section 11 hereof, without the prior written consent of Aspec, neither Chip &
Chip, the Majority Shareholders nor any of Chip & Chip's other officers,
directors, shareholders, agents or Affiliates shall, directly or indirectly, (a)
solicit, conduct discussions with or engage in negotiations with any person,
other than Aspec, relating to the possible acquisition of Chip & Chip or any of
its subsidiaries (whether by way of merger, purchase of capital stock, purchase
of assets or otherwise) or any material portion of its or their capital stock or
assets, (b) provide information with respect to Chip & Chip or any of its
subsidiaries to any person, other than Aspec, relating to the possible
acquisition of Chip & Chip or any of its subsidiaries (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (c) enter into an agreement
with any person, other than Aspec, providing for the acquisition of Chip & Chip
or any of its subsidiaries (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (d) make or authorize any statement, recommendation or
solicitation in support of any possible acquisition of Chip & Chip or any of it
subsidiaries (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any material portion of its or their capital stock or
assets by any person, other than by Aspec, (e) enter into any agreement with any
person, other than Aspec, providing for any extension of credit (other than
trade credit in the ordinary course of business) or other debt investment in
Chip & Chip, or (f) enter into any additional agreement for the licensing or
distribution of products, technology, or intellectual property of Chip & Chip,
whether now existing or hereafter created. In addition to the foregoing, if Chip
& Chip or any of its subsidiaries receives any unsolicited offer or proposal to
enter negotiations relating to any of the above, Chip & Chip shall immediately
notify Aspec thereof, including information as to the identity of the offeror or
the party making any such offer or proposal and the specific terms of such offer
or proposal, as the case may be. From and after the date hereof until the first
to occur of the Closing of the Merger or the termination of this Agreement
pursuant to Section 11 hereof, none of the Majority Shareholders will transfer
or offer to transfer any of their Chip & Chip Common Stock except to Aspec
pursuant to the Merger.
8. Post-Closing Covenants. With respect to the period following the
Effective Time of the Merger:
8.1 General. In case at any time after the Effective Time of the
Merger any further action is necessary to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents)
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as any other Party reasonably may request, all at the sole cost and expense of
the requesting Party (unless the requesting Party is entitled to indemnification
therefor under Section 10 below).
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction (A) on or
prior to the Effective Time of the Merger involving Chip & Chip or the Majority
Shareholders or (B) arising out of Aspec's operation of the business of the
Surviving Corporation following the Effective Time of the Merger in the manner
in which it is presently conducted and planned to be conducted, each of the
other Parties will cooperate with the party, its counsel in the contest or
defense, make available their personnel, and provide such testimony and access
to their books and records as shall be reasonably necessary in connection with
the contest or defense, all at the sole cost and expense of the contesting or
defending Party (unless the contesting or defending Party is entitled to
indemnification therefor under Section 10 below).
8.3 Transition. None of the Majority Shareholders will take any
action that is designed or intended to have the effect of discouraging any
lessor, licensor, customer, supplier, or other business associate of Chip & Chip
from maintaining the same business relationships with the Surviving Corporation
after the Effective Time of the Merger as it maintained with Chip & Chip prior
to the Effective Time of the Merger.
8.4 Confidentiality. Each of the parties hereto hereby agrees to
keep such information or knowledge obtained in any due diligence or other
investigation pursuant to the negotiation and execution of this Agreement or the
effectuation of the transactions contemplated hereby, confidential in accordance
with the terms of that certain Nondisclosure and Nonsolicitation Agreement
between Aspec and Chip & Chip dated June 7, 1999 (the "NONDISCLOSURE
AGREEMENT").
8.5 C&C Employees; Employee Stock Options. Upon the Effective
Date of the Merger, all employees of Chip&Chip shall be offered employment with
the Surviving Corporation. In addition, upon the Effective Date of the Merger,
Chip&Chip employees and certain future employees shall be granted an option to
purchase an aggregate of 1,300,000 shares of Aspec Common Stock (in such amounts
to be mutually determined by the Chief Executive Officer of Chip&Chip and
Aspec). Stock options for a maximum of 25,000 shares shall be issued for each
employee as determined by William. Ho; except for Wai-Yan Ho and Chong-Ming Lin,
who will be granted options for 700,000 shares and 300,000 shares, respectively.
All stock option grants are subject to ASPEC board approval. All such options
shall have an exercise price equal to the fair market value of the ASPEC Common
Stock on the date of grant and shall be time based and shall vest over a four
(4) year period with twenty-five percent (25%) vesting after each full year of
employment by Chip & Chip or ASPEC after the date of grant. Stock options for
five hundred thousand (500,000) shares of Mr. Ho's stock options are subject to
accelerated vesting over a two (2) year or greater period of time based upon
three (3) months after the start of a beta site evaluation of each of the Chip &
Chip software products in amounts to be determined by ASPEC and in accordance
with a product introduction schedule to be agreed upon between Chip & Chip and
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ASPEC. The stock options for Messrs. Ho and Lin shall be granted on the date of
Closing. The options shall also be subject to the other terms and conditions of
Aspec's 1996 Stock Option Plan (the "STOCK PLAN"). All employees of Chip & Chip
that are employees of the Surviving Corporation following the Closing shall
execute Aspec's standard form of employee confidentiality and inventions
assignment agreement.
9. Conditions to Obligations to Close.
9.1 Conditions to Aspec's Obligation to Close. The obligations of
Aspec to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties of Chip & Chip and
the Majority Shareholders set forth in Section 5 above shall be true and correct
in all material respects at and as of the Closing Date;
(b) Chip & Chip and the Majority Shareholders shall have
performed and complied with all of their respective covenants hereunder in all
material respects through the Closing;
(c) Chip & Chip shall have obtained such of the third party
consents listed on Section 5.4 of the Chip & Chip Disclosure Schedule as may be
mutually agreed to by Aspec and Chip & Chip; -
(d) no action, suit, or proceeding shall be pending before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator (other than such an
action initiated by Aspec or Merger Sub) wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (A) prevent consummation of any
of the transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) affect materially and adversely the right of Aspec or
Merger Sub to control Chip & Chip following the Effective Time of the Merger,
and no law, statute, ordinance, rule, regulation or order shall have been
enacted, enforced or entered which has caused or will likely cause any of the
effects under clause (A), (B) or (C) of this Section 9.1(d) to occur.
(e) the President and the Chief Financial Officer of Chip &
Chip and the Majority Shareholders shall have delivered to Aspec a certificate
to the effect that each of the conditions specified above in Section 9.1(a) to
9.1(d) (inclusive) is satisfied in all material respects;
(f) No Material Adverse Effect shall have occurred with
respect to Chip & Chip;
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(g) Aspec shall have received from counsel to Chip & Chip
and the Majority Shareholders an opinion in form and substance as set forth in
Exhibit E attached hereto, addressed to Aspec, and dated as of the Closing Date;
(h) this Agreement and the Merger shall have been approved
by the vote of the holders of 100% of the outstanding shares of Common Stock of
Chip & Chip;
(i) all outstanding options, convertible securities and
other Stock Rights to purchase securities of Chip & Chip shall have been
exercised or canceled; and
(j) Wai-Yan Ho, Chong-Ming Lin, Yong Yuan, J.J. Cho, and
B.H. Park Kim shall have accepted employment with the Surviving Corporation; and
(k) Aspec's Board of Directors shall have approved this
Agreement.
(l) The OEM Agreement with Redac Systems Ltd. shall have
been finalized and approved by both parties' attorneys.
Aspec may waive any condition (in whole or in part) specified in
this Section 9.1 if it executes a writing so stating at or prior to the Closing.
9.2 Conditions to Chip & Chip 's Obligation. The obligation of
Chip & Chip and the Majority Shareholders to consummate the transactions to be
performed by each of them in connection with the Closing is subject to
satisfaction of the following conditions:
(a) the representations and warranties of Aspec set forth in
Section 6 above shall be true and correct in all material respects at and as of
the Closing Date;
(b) Aspec shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(c) no action, suit, or proceeding shall be pending before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator (other than such an
action initiated by Chip & Chip or any of the Majority Shareholders) wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this Agreement
or (B) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);
(d) the Chief Executive Officer or other duly authorized
officer of Aspec shall have delivered to Chip & Chip a certificate to the effect
that each of the conditions specified above in Section 9.2(a) to 9.2(c)
(inclusive) is satisfied in all material respects;
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(e) Chip & Chip shall have received from counsel to Aspec an
opinion in form and substance as set forth in Exhibit F attached hereto,
addressed to Chip & Chip , and dated as of the Closing Date;
(f) No Material Adverse Change shall have occurred with
respect to Aspec.
Chip & Chip and the Majority Shareholders may waive any condition
(in whole or in part) specified in this Section 9.2 if Chip & Chip executes a
writing so stating at or prior to the Closing.
10. Survival of Representations, Indemnification.
10.1 Limited Survival of Representations and Warranties. All
covenants of Aspec, Merger Sub, Chip & Chip and the Majority Shareholders to be
performed prior to the Effective Time of the Merger, and all representations and
warranties of Aspec, Chip & Chip and the Majority Shareholders in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Merger for a period of twelve (12) months from the Effective Time of the Merger
(the "EXPIRATION DATE"), and, notwithstanding anything to the contrary in this
Agreement, no claim for breach of any representation, warranty or covenant by
any Party and no claim for indemnification by Aspec or the Majority Shareholders
hereunder shall be brought at any time after the Expiration Date.
10.2 Indemnification by Aspec.
(a) From and after the Effective Time of the Merger, Aspec
shall indemnify and hold harmless each of the Majority Shareholders, and each of
the heirs, executors, successors and assigns of any of the foregoing, from and
against any and all Losses arising out of, or in connection with, any breach of
any representation or warranty or of any covenant, agreement, or undertaking
made by Aspec in this Agreement.
(b) Notwithstanding any provision to the contrary in this
Agreement, the maximum obligation and liability of Aspec and Merger Sub to any
Chip & Chip shareholder (including the Majority Shareholders) shall be
determined by multiplying the number of shares of Aspec Common Stock received by
each such Chip & Chip shareholder in the Merger by $1.00.
10.3 Indemnification by Majority Shareholders.
(a) From and after the Effective Time of the Merger, each of
Chip & Chip and the Majority Shareholders shall indemnify and hold harmless
Aspec, Merger Sub and each of their respective Affiliates, and each of their
respective directors, officers, employees and agents, and each of the heirs,
executors, successors and assigns of any of the foregoing, from and against any
and all Losses arising out of, or in connection with, any breach of any
representation or warranty or of any covenant, agreement, or undertaking made by
Chip & Chip or the Majority Shareholders in this Agreement. The liability of the
Majority Shareholders hereunder shall be several in proportion
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to number of shares of Aspec Common Stock received by each such Majority
Shareholder and his Affiliates as a result of the Merger, and not joint.
(b) The Majority Shareholders may agree, as among themselves
and without limiting the rights of Aspec or Merger Sub hereunder, as to the
respective amounts of any liability for which they each shall be responsible.
(c) Any payment made pursuant to this Section 10.3 or
Section 10.2 hereof shall be treated by the Parties as an adjustment to the
purchase price provided for herein, and the Parties agree not to take any
position inconsistent therewith for any purpose.
10.4 Notice of Claims. No action or proceeding may be brought by
a party seeking indemnification hereunder (the "INDEMNIFIED PARTY") with respect
to any breach of the representations, warranties, covenants or agreements made
hereunder unless written notice thereof, setting forth in reasonable detail (to
the extent then known) the amount of the claim and the claimed misrepresentation
or breach of warranty or breach of covenant or agreement, or the reasons for
which such Indemnified Party believes there has been or may have been a breach
of representation, warranty, covenant or agreement, shall have been delivered to
the party alleged to have breached such representation, warranty, covenant or
agreement (the "INDEMNIFYING PARTY") on or prior to the Expiration Date. If the
Indemnifying Party contests the assertion of the claim, then the parties shall
act in good faith to reach agreement regarding such claim.
10.5 Third Party Claims. If a claim by a third party is made
against an Indemnified Party, and if such Indemnified Party intends to seek
indemnity with respect thereto under this Section 10, such Indemnified Party
shall promptly notify the Indemnifying Party in writing of such claims setting
forth such claims in reasonable detail; provided, however, that failure of such
Indemnified Party to give such notice shall not result in a waiver of its
indemnity rights except to the extent that such failure prejudices the
Indemnifying Party's ability to respond to or defend the claim. The Indemnifying
Party shall have thirty (30) days after receipt of such notice to undertake,
through counsel of its own choosing and at its own expense, the settlement or
defense thereof, and the Indemnified Party shall cooperate with it in connection
therewith; provided, however, that the Indemnified Party may participate in such
settlement or defense through counsel chosen by such Indemnified Party, provided
that the fees and expenses of such counsel shall be borne by such Indemnified
Party. The Indemnified Party shall not pay or settle any claim without the
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld. The Indemnifying Party will not pay or settle any claim
unless it contains an unconditional release of the Indemnified Party. If the
Indemnifying Party does not within thirty (30) days after the receipt of the
Indemnified Party's notice of a claim of indemnity hereunder undertake the
defense thereof or if the Indemnified Party must obtain separate legal counsel
due to an actual or potential conflict arising from such claim (as determined in
good faith by the Indemnified Party's legal counsel), the Indemnified Party
shall have the right to contest, settle or compromise the claim but shall not
thereby waive any right to indemnity therefor (and for all associated reasonable
costs and attorney's fees which, in the case of such costs and fees, shall be
reimbursed by the Indemnifying Party as incurred) pursuant to this Agreement.
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10.6 Limitation of Claims. The Majority Shareholders shall not be
liable for any claims by Aspec made hereunder unless and until the aggregate
amount of all such claims against one or more of the Majority Shareholders
exceeds $10,000, provided that in the event such claims exceed $10,000, Aspec
shall be entitled to recover for the full amount of such claims (including the
$10,000 limitation). Aspec and Merger Sub shall not be liable for any claims by
the Majority Shareholders made hereunder unless and until the aggregate amount
of all such claims against Aspec and Merger Sub exceeds $10,000, provided that
in the event such claims exceed $10,000, the Majority Shareholders shall be
entitled to recover for the full amount of such claims (including the $10,000
limitation).
11. Termination.
11.1 Termination of the Agreement. This Agreement may be
terminated at any time prior to the Closing as follows:
(a) Aspec and Chip & Chip may terminate this Agreement as to
all Parties by mutual written consent at any time prior to the Closing.
(b) Aspec may terminate this Agreement by giving written
notice to Chip & Chip and the Majority Shareholders at any time prior to the
Closing (A) in the event either of Chip & Chip or the Majority Shareholders has
materially breached any representation, warranty, or covenant contained in this
Agreement and Aspec has notified Chip & Chip and the Majority Shareholders of
the breach or (B) if the Closing shall not have occurred on or before August 6,
1999, by reason of the failure of any condition precedent under Section 9.1
hereof (unless the failure results primarily from Aspec itself materially
breaching any representation, warranty, or covenants contained in this
Agreement).
(c) Aspec may terminate this Agreement by giving written
notice to Chip & Chip and the Majority Shareholders at any time prior to 5:00
p.m. (California time) on August 2, 1999 in the event that Aspec is not
satisfied in its sole discretion with the results of its due diligence
investigation regarding the business and financial and corporate records of Chip
& Chip.
(d) Chip & Chip may terminate this Agreement by giving
written notice to Aspec at any time prior to the Closing (A) in the event Aspec
has materially breached any representation, warranty, or covenant contained in
this Agreement and Chip & Chip has notified Aspec of the breach, or (B) if the
Closing shall not have occurred on or before August 6, 1999, by reason of the
failure of any condition precedent under Section 9.2 hereof (unless the failure
results primarily from Chip & Chip or the Majority Shareholders materially
breaching any representation, warranty, or covenants contained in this
Agreement).
11.2 Effect of Termination.
(a) If any Party terminates this Agreement pursuant to Section 11 above,
all rights and obligations of the Parties hereunder shall terminate without any
liability of any Party to any other
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Party (except for any liability of any Party then in breach); provided, however,
that the Confidentiality Agreement shall survive in accordance with its terms.
12. Miscellaneous.
12.1 Publicity. No Party shall issue any press release or make
any public announcement relating to the subject matter of this Agreement prior
to the Closing without the prior written approval of Aspec and Chip & Chip.
Notwithstanding the foregoing, Aspec may disclose the Merger in its filings with
the Securities and Exchange Commission to the extent required by applicable
securities laws.
12.2 No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties, the
shareholders of Chip & Chip and their respective successors and permitted
assigns.
12.3 Entire Agreement. This Agreement (including the exhibits and
schedules hereto) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof (including that certain letter agreement between Aspec and
Chip & Chip dated June 10, 1999). Notwithstanding the foregoing, Chip & Chip and
Aspec agree that the terms of the Confidentiality Agreement shall remain in
effect.
12.4 Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other Parties.
12.5 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
12.6 Headings. The Section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
12.7 Notices. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one (1) business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
(1) business day after the business day of facsimile transmission, if delivered
by facsimile transmission with copy by first class mail, postage prepaid, and
shall be addressed to the intended recipient as set forth below:
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If to Aspec or Merger Sub:
Aspec Technology, Inc.
830 East Arques Avenue
Sunnyvale, California 94086
Attention: Douglas E. Klint,
President and Chief Executive Officer
Copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: J. Robert Suffoletta, Esq.
If to Chip & Chip or the Majority Shareholders:
Chip & Chip, Inc.
4655 Old Ironsides Drive, Suite 420
Santa Clara, California 95054
Attention: Wai-Yan Ho, Chief Executive Officer
Any Party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
Parties written notice of such change in accordance with the above provisions.
12.8 Governing Law; Dispute Resolution.
(a) This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of California without giving
effect to any choice or conflict of law provision or rule (whether of the State
of California or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of California.
(b) It is the express intention of the Parties to this
Agreement to make a good faith effort to resolve, without resort to arbitration,
any dispute arising under or related to this Agreement. In the event of a
dispute relating to any provision of this Agreement which cannot be resolved
promptly by negotiations between the Parties involved directly in the dispute,
any Party to the dispute may give the other Party written notice of its intent
to arbitrate, as provided in this Section 12.8. No arbitration may commence
earlier than thirty (30) days after the delivery of the notice of intent to
arbitrate, unless the failure to commence arbitration is reasonably likely to
result in some demonstrable harm.
(c) The Parties hereto agree that the appropriate and
exclusive forum for any disputes among any of the Parties hereto arising out of
this Agreement or the transactions contemplated hereby, shall be settled by
arbitration in Santa Clara County, California, in accordance
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with the rules of the American Arbitration Association, and judgment upon any
award rendered by the arbitrator or arbitrators may be entered in any court
having jurisdiction thereof. The arbitration panel will consist of three (3)
people to be mutually selected by the Parties to the dispute. In the event that
the Parties to the dispute cannot agree upon the arbitrators within ten (10)
days after the commencement of the arbitration procedures, one (1) arbitrator
shall be selected by Aspec, one (1) arbitrator shall be selected by the Majority
Shareholders involved in the dispute and one (1) arbitrator shall be selected by
the two (2) other arbitrators so designated. The parties further agree, to the
extent permitted by law, that final and non-appealable judgment against any of
them in any action or proceeding contemplated above shall be conclusive and may
be enforced in any other jurisdiction within or outside the United States by
suit on the judgment, a certified or exemplified copy of which shall be
conclusive evidence of the fact and amount of such judgment. The Parties hereby
consent to the jurisdiction of the Superior Court of the State of California and
the United States District Courts of California and waive any objections or
rights as to forum nonconvenience, lack of personal jurisdiction or similar
grounds with respect to the enforcement of any such judgment.
(d) In the event of any arbitration proceeding hereunder,
the arbitrator(s) shall have the discretion to award the prevailing party
reimbursement of all costs and expenses incurred in connection with said action,
including reasonable attorney's fees.
(e) To the extent that Aspec or the Majority Shareholders
have or hereafter may acquire any immunity from jurisdiction of any court or
from any legal process (whether through service or notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise) with respect
to itself or its property, Aspec and the Majority Shareholders (as the case may
be) hereby irrevocably waive such immunity in respect of its obligations with
respect to this Agreement.
12.9 Amendments and Waivers. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
Aspec, Merger Sub, Chip & Chip and the Majority Shareholders. No waiver by any
Party of any default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent occurrence.
12.10 Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
12.11 Expenses. Each of Aspec, Chip & Chip and the Majority
Shareholders will bear its or their own costs and expenses (including legal and
accounting fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby; provided, however, that the Majority
Shareholders will be responsible for (i) any brokers', finders' or advisory fees
payable on behalf of Chip & Chip in connection with the Agreement and the
transactions contemplated hereby, and (ii) any legal or accounting fees
undertaken on behalf of Chip & Chip or
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the Majority Shareholders in connection with the Agreement and the transactions
contemplated hereby in excess of $50,000 which may be paid by Chip & Chip.
12.12 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
12.13 Incorporation of Exhibits and Schedules. The Exhibits
identified in this Agreement are incorporated herein by reference and made a
part hereof.
THIS SPACE LEFT INTENTIONALLY BLANK
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
as of the date first above written.
Aspec: ASPEC TECHNOLOGY, INC.
By:_______________________________________
Conrad J. Dell'Oca
Chairman of the Board of Directors
Merger Sub: ASPEC ACQUISITION CORPORATION
By:_______________________________________
Douglas E. Klint
President
Chip & Chip: CHIP & Chip, INC.
By:_______________________________________
Wai-Yan Ho
Chairman and Chief Executive Officer
Majority Shareholders: __________________________________________
Wai-Yan Ho
__________________________________________
Chong-Ming Lin
[AGREEMENT AND PLAN OF REORGANIZATION SIGNATURE PAGE]
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<PAGE> 1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ASPEC TECHNOLOGY, INC.,
ASPEC ACQUISITION THREE CORPORATION,
NOVO SYSTEMS CORPORATION
OCTOBER 20, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Certain Definitions ......................................................... 6
2. The Merger .................................................................. 7
2.1 Merger; Effective Time of the Merger .................................. 7
2.2 Closing ............................................................... 8
2.3 Effect of the Merger .................................................. 8
2.4 Tax-Free Reorganization ............................................... 8
2.5 Novo Stock Options and Convertible Securities. ........................ 8
3. Effect of Merger on the Capital Stock of Novo; Exchange of Certificates ..... 8
3.1 Exchange of Stock ..................................................... 8
3.2 Fractional Shares ..................................................... 8
3.3 Exchange of Certificates .............................................. 9
3.4 Taking of Necessary Action; Further Action ............................ 10
4. Securities Act Compliance ................................................... 10
4.1 Securities Act Exemption .............................................. 10
4.2 Stock Restrictions .................................................... 10
5. Representations and Warranties of Novo and the Majority Shareholders ........ 11
5.1 Organization, Qualification, and Corporate Power ...................... 11
5.2 Authorization ......................................................... 11
5.3 Capitalization ........................................................ 11
5.4 Noncontravention ...................................................... 12
5.5 Broker's Fees ......................................................... 12
5.6 Financial Statements .................................................. 13
5.7 Subsidiaries .......................................................... 13
5.8 Title to Assets ....................................................... 13
5.9 Events Subsequent to Most Recent Fiscal Period End .................... 13
5.10 Undisclosed Liabilities ............................................... 16
5.11 Legal Compliance ...................................................... 16
5.12 Tax Matters ........................................................... 16
5.13 Properties ............................................................ 17
5.14 Intellectual Property ................................................. 18
5.15 Tangible Assets ....................................................... 20
5.16 Inventory ............................................................. 20
5.17 Contracts ............................................................. 20
</TABLE>
PAGE 2
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
5.18 Notes and Accounts Receivable ......................................... 22
5.19 Power of Attorney ..................................................... 22
5.20 Insurance ............................................................. 22
5.21 Litigation ............................................................ 22
5.22 Product Warranty ...................................................... 22
5.23 Product Liability ..................................................... 23
5.24 Employees ............................................................. 23
5.25 Employee Benefits ..................................................... 23
5.26 Guaranties ............................................................ 25
5.27 Environment, Health, and Safety ....................................... 25
5.28 Certain Business Relationships With Novo .............................. 27
5.29 No Adverse Developments ............................................... 27
5.30 Full Disclosure ....................................................... 27
6. Representations and Warranties of Aspec ..................................... 27
6.1 Organization, Qualification, and Corporate Power ...................... 28
6.2 Authorization ......................................................... 28
6.3 Capitalization ........................................................ 28
6.4 Noncontravention ...................................................... 29
6.5 Brokers' Fees ......................................................... 29
6.6 SEC Filings ........................................................... 29
6.7 Financial Statements .................................................. 29
6.8 Litigation ............................................................ 29
6.9 No Adverse Developments ............................................... 30
7. Pre-Closing Covenants ....................................................... 30
7.1 General ............................................................... 30
7.2 Notices and Consents .................................................. 30
7.3 Conduct of Business ................................................... 30
7.4 Preservation of Business .............................................. 31
7.5 Access to Information ................................................. 31
7.6 Notice of Developments ................................................ 31
7.7 Exclusivity ........................................................... 31
8. Post-Closing Covenants ...................................................... 32
8.1 General ............................................................... 32
8.2 Litigation Support .................................................... 32
8.3 Transition ............................................................ 32
8.4 Confidentiality ....................................................... 33
</TABLE>
PAGE 3
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
8.5 Novo Employees; Employee Stock Options ................................ 33
9. Conditions to Obligations to Close .......................................... 33
9.1 Conditions to Aspec's Obligation to Close ............................. 33
9.2 Conditions to Novo's Obligation ....................................... 34
10. Survival of Representations, Indemnification ................................ 35
10.1 Limited Survival of Representations and Warranties .................... 35
10.2 Indemnification by Aspec .............................................. 35
10.3 Indemnification by Majority Shareholders .............................. 36
10.4 Notice of Claims ...................................................... 36
10.5 Third Party Claims .................................................... 36
10.6 Limitation of Claims .................................................. 36
11. Termination ................................................................. 37
11.1 Termination of the Agreement .......................................... 37
11.2 Effect of Termination ................................................. 38
12. Miscellaneous ............................................................... 38
12.1 Publicity ............................................................. 38
12.2 No Third-Party Beneficiaries .......................................... 38
12.3 Entire Agreement ...................................................... 38
12.4 Succession and Assignment ............................................. 39
12.5 Counterparts .......................................................... 39
12.6 Headings .............................................................. 39
12.7 Notices ............................................................... 39
12.8 Governing Law; Dispute Resolution ..................................... 40
12.9 Amendments and Waivers ................................................ 41
12.10 Severability .......................................................... 41
12.11 Expenses .............................................................. 41
12.12 Construction .......................................................... 42
12.13 Incorporation of Exhibits and Schedules ............................... 42
</TABLE>
EXHIBITS
Exhibit A Certificate of Merger
Exhibit B List of Novo Shareholders
Exhibit C Novo Disclosure Schedule
Exhibit D Aspec Disclosure Schedule
Exhibit E Opinion of Counsel for Novo
Exhibit F Opinion of Counsel for Aspec
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<PAGE> 5
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "AGREEMENT") is entered
into as of October 20, 1999, by and among Aspec Technology, Inc., a Delaware
corporation ("ASPEC"), Aspec Acquisition Three Corporation, a California
corporation and a wholly-owned subsidiary of Aspec ("MERGER SUB"), Novo System
Corporation, a California corporation ("NOVO"). Aspec, Merger Sub, Novo are
sometimes referred to herein individually as a "PARTY" and collectively as the
"PARTIES."
RECITALS
A. Pursuant to a Certificate of Merger (together with any Articles
of Merger required by the CBCA) providing for the merger of Merger Sub with and
into Novo pursuant to the California Business Corporation Act (the "CBCA") and
the Delaware General Corporation Law (the "DGCL"), the shares of Common Stock of
Novo, no par value, issued and outstanding immediately prior to the effective
time of the Merger will be converted into an aggregate of 1,600,000 shares of
Common Stock of Aspec and $1,000,000 cash, and Novo will become a wholly-owned
subsidiary of Aspec.
B. The Parties desire to enter into this Agreement for the purpose
of setting forth certain representations, warranties and covenants made by each
to the other as an inducement to the execution and delivery of this Agreement,
and to serve as conditions precedent to the consummation of the merger of Merger
Sub with and into Novo.
C. The respective Boards of Directors of Aspec and Novo have
approved and adopted this Agreement, and the Agreement is intended to be a plan
of reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements, representations, warranties and covenants herein contained, the
parties hereto do hereby agree as follows:
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<PAGE> 6
AGREEMENT
1. Certain Definitions. As used in this Agreement, the following
terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and vice versa). Certain other terms
are defined in the text of this Agreement.
"AFFILIATE" of a Person means any other Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with such Person.
"BUSINESS CONDITION" means the business, financial condition,
results of operations and assets of such corporate entity.
"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation, retirement plan, severance plan or similar plan or arrangement;
(b) Employee Pension Benefit Plan; (c) Employee Welfare Benefit Plan; and (d)
any other nonqualified plan providing welfare benefits, including but not
limited to medical, dental, life insurance and disability benefits.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in
ERISA Sec. 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in
ERISA Sec. 3(1).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"GROSS NEGLIGENCE" consists of an intentional act, or the
failure to perform a duty, with reckless disregard for the consequences of such
act or failure.
"INTELLECTUAL PROPERTY" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof, (b)
all trademarks, service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, drawings, specifications, customer and supplier lists,
pricing and cost information, financial information, and business and marketing
plans and proposals), (e) all computer
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<PAGE> 7
software (including data and related documentation), (f) all other proprietary
rights, and (g) all copies and tangible embodiments thereof (in whatever form or
medium).
"LOSSES" shall mean any and all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs,
reasonable amounts paid in settlement, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including court costs and reasonable attorneys' fees
and expenses in connection with any action, suit or proceeding to the extent of
the amount of such actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, reasonable amounts paid in
settlement, liabilities, obligations, taxes, liens, losses, expenses or fees.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on the Business Condition of the corporate entity and its subsidiaries.
"MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Sec.
3(37) and Code Sec. 414(f).
"NOVO SHAREHOLDERS" shall mean the shareholders of record of
Novo immediately prior to the Effective Time of the Merger (other than the
holders of Dissenting Shares (as defined herein)).
"ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency).
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"SECURITY INTEREST" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and payable,
(c) purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
2. The Merger.
2.1 Merger; Effective Time of the Merger. Subject to the
terms and conditions of this Agreement, Merger Sub will be merged with and into
Novo (the "MERGER") in accordance with the CBCA and the DGCL, and, as a result,
Novo will become a wholly-owned subsidiary of Aspec. In accordance with the
provisions of this Agreement, a Certificate of Merger in the form attached
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<PAGE> 8
hereto as Exhibit A shall be filed with the California Secretary of State in
accordance with the CBCA (or, to the extent required by the CBCA, Articles of
Merger in form and substance mutually acceptable to counsel for Novo and counsel
for Aspec) on the Closing Date (as defined in Section 2.2) and each issued and
outstanding share of Common Stock, no par value, of Novo ("NOVO COMMON STOCK")
shall be converted into a fraction of a share of Common Stock, $0.001 par value,
of Aspec ("ASPEC COMMON STOCK") in the manner contemplated by Section 3. The
Merger shall become effective at the time of the filing of the Merger Agreement
with the California Secretary of State (the date of such filing being
hereinafter referred to as the "EFFECTIVE DATE OF THE MERGER" and the time of
such filing being hereinafter referred to as the "EFFECTIVE TIME OF THE
MERGER").
2.2 Closing. The closing of the Merger (the "CLOSING") will
take place as soon as practicable after satisfaction or waiver of the latest to
occur of the conditions set forth in Section 9 (the "CLOSING DATE"), at the
offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page
Mill Road, Palo Alto, California 94304-1050, but no later than October 15, 1999.
2.3 Effect of the Merger. At the Effective Time of the
Merger, (i) the separate existence of Merger Sub shall cease and Merger Sub
shall be merged with and into Novo (Merger Sub and Novo are sometimes referred
to herein as the "CONSTITUENT CORPORATIONS" and Novo after the Merger is
sometimes referred to herein as the "SURVIVING CORPORATION"), (ii) the
Certificate of Incorporation of Merger Sub shall be the Certificate of
Incorporation of the Surviving Corporation, (iii) the Bylaws of Merger Sub shall
be the Bylaws of the Surviving Corporation, (iv) the directors of Merger Sub
shall be the directors of the Surviving Corporation and (v) the Merger shall,
from and after the Effective Time of the Merger, have all the effects provided
by applicable law.
2.4 Tax-Free Reorganization. The Merger is intended to
qualify as a tax free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE").
2.5 Novo Stock Options and Convertible Securities. On or
prior to the Effective Time of the Merger, all outstanding options, warrants and
convertible securities of Novo shall terminate unless otherwise exercised prior
to such time.
3. Effect of Merger on the Capital Stock of Novo; Exchange of
Certificates
3.1 Exchange of Stock and Cash Consideration. As of the
Effective Time of the Merger, each share of Novo Common Stock that is issued and
outstanding immediately prior to the Effective Time of the Merger as provided
for in Section 3.2 below), shall, by virtue of the Merger and without any action
on the part of Novo Shareholders, be converted into (i) shares of Aspec Common
Stock, and (ii) cash payment determined by dividing 2,600,000 by the aggregate
number of shares of Novo Common Stock (the "EXCHANGE RATIO") issued and
outstanding immediately prior to the
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<PAGE> 9
Effective Time of the Merger (including any shares issued upon the exercise of
outstanding Novo options or Novo convertible securities and any Dissenting
Shares). Attached as Exhibit B is a Novo shareholder list showing the shares of
Aspec Common Stock and cash to be exchanged for the shares of Novo Common Stock
held by each Novo Shareholder.
3.2 Fractional Shares. No fractional shares of Aspec Common
Stock shall be issued in the Merger. In lieu thereof, each holder of shares of
Novo Common Stock who would otherwise be entitled to receive a fraction of a
share of Aspec Common Stock shall receive from Aspec an amount of cash (rounded
to the nearest whole cent) equal to the product of the fraction of a share of
Aspec Common Stock to which such holder would otherwise be entitled, multiplied
by $1.00. For the purpose of determining fractional shares, all shares of Aspec
Common Stock to be issued to any Novo shareholder shall be aggregated.
3.3 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, Aspec
shall appoint itself or ChaseMellon Shareholder Services, L.L.C. to act as the
exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) Aspec to Provide Aspec Common Stock. Promptly
after the Effective Date of the Merger, Aspec shall make available for exchange
in accordance with this Section 3, through such reasonable procedures as Aspec
may adopt, the shares of Aspec Common Stock issuable pursuant to Section 3.1 in
exchange for outstanding shares of Novo Common Stock.
(c) Exchange Procedures. Within ten (10) days after
the Effective Date of the Merger, the Exchange Agent shall mail to each holder
of record of a certificate or certificates which immediately prior to the
Effective Date of the Merger represented outstanding shares of Novo Common Stock
(the "CERTIFICATES") whose shares are being converted into shares of Aspec
Common Stock pursuant to Section 3.1 hereof (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and which shall be in such form and have such other provisions as Aspec
may reasonably specify, including appropriate investment representations to be
made by each such shareholder) (the "LETTER OF TRANSMITTAL") and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for shares of Aspec Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Aspec, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor the
number of shares of Aspec Common Stock to which the holder of Novo Common Stock
is entitled pursuant to Section 3.1 hereof. The Certificate so surrendered shall
forthwith be canceled. No interest will accrue or be paid to the holder of any
outstanding Novo Common Stock. From and after the Effective Date of the Merger,
until
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surrendered as contemplated by this Section 3.4, each Certificate shall be
deemed for all corporate purposes to evidence the number of shares of Aspec
Common Stock into which the shares of Novo Common Stock represented by such
Certificate have been converted. Notwithstanding the foregoing procedures, Aspec
shall use its reasonable efforts to provide the form of Letter of Transmittal to
Novo as soon as practical after the date hereof, and Novo shall provide such
Letter of Transmittal to each Novo shareholder. The parties agree that in the
event Aspec makes such Letter of Transmittal available to Novo, any Exchange
Agent shall not be obligated to mail such Letter of Transmittal to the Novo
shareholders.
(d) No Further Ownership Rights in Capital Stock of
Novo. The shares of Aspec Common Stock delivered upon the surrender for exchange
of shares of Novo Common Stock in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
such Novo Common Stock. There shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of Novo Common Stock which
were outstanding immediately prior to the Effective Date of the Merger. If,
after the Effective Date of the Merger, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Section 3.4, provided that the presenting holder is listed on
Novo's shareholder list as a holder of Novo Common Stock.
3.2 Taking of Necessary Action; Further Action. Aspec,
Merger Sub, Novo shall take all such actions as may be necessary or appropriate
in order to effect the Merger as promptly as possible. If, at any time after the
Effective Date of the Merger, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of Novo, the officers and directors of the
Surviving Corporation are fully authorized in the name of the corporation or
otherwise to take, and shall take, all such action.
4. Securities Act Compliance.
4.1 Securities Act Exemption. The issuance of the Aspec
Common Stock in the Merger shall not be registered under the Securities Act of
1933, as amended (the "SECURITIES ACT"), in reliance upon Section 4(2) and/or
Regulation D of the Securities Act.
4.2 Stock Restrictions. The certificates representing the
shares of Aspec Common Stock issued pursuant to this Agreement shall bear a
restrictive legend (and stop transfer orders shall be placed against the
transfer thereof with Aspec's transfer agent), stating substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
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1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, OFFERED
FOR SALE, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF
EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO, (II) IN COMPLIANCE WITH RULE
144 OR (III) PURSUANT TO AN OPINION OF COUNSEL FOR ASPEC
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933."
5. Representations and Warranties of Novo . Novo represents and
warrants to Aspec and Merger Sub that the statements contained in this Section 5
are correct and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
Section 5), except as set forth in the disclosure schedule delivered by Novo to
Aspec on the date hereof (and initialed by Aspec), a copy of which is attached
hereto as Exhibit C (referred to herein as the "NOVO DISCLOSURE SCHEDULE"). The
Novo Disclosure Schedule will be arranged in paragraphs corresponding to the
lettered and numbered paragraphs contained in this Section 5.
5.1 Organization, Qualification, and Corporate Power. Novo
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of California. Novo is duly authorized to conduct business
and is in good standing under the laws of each other jurisdiction where such
qualification is required. Except as disclosed in Section 5.1 of the Novo
Disclosure Schedule, there is no state, other than California, in which Novo
owns any property or in which it has any employees, offices or operations. Novo
has full corporate power and authority, and has all necessary and material
licenses and permits, to carry on the businesses in which it is engaged and to
own and use the properties owned and used by it. Section 5 of the Novo
Disclosure Schedule lists the directors and officers of Novo. The operations now
being conducted by Novo have not been conducted under any other name during the
past five (5) years, except as disclosed in Section 5.1 of the Novo Disclosure
Schedule.
5.2 Authorization. Novo has full power and authority to
execute and deliver this Agreement and the Merger Agreement, and, subject to
receipt of the requisite approval of its shareholders, to consummate the
transactions contemplated hereunder and to perform its obligations hereunder and
no other proceedings on the part of Novo are necessary to authorize the
execution, delivery and performance of this Agreement and the Merger Agreement.
This Agreement and the Merger Agreement and the transactions contemplated
thereby have been approved by the Novo's Board of Directors and Shareholders.
This Agreement and the Merger Agreement constitute the valid and legally binding
obligations of Novo, enforceable against Novo in accordance with their
respective terms and conditions. Novo need not give any notice to, make any
filing with, or obtain
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any authorization, consent, or approval of any government or governmental agency
in order to consummate the transactions contemplated by this Agreement.
5.3 Capitalization.
(a) Capital Stock. As of the date of this Agreement,
the entire authorized capital stock of Novo consists of 10,000,000 shares of
Common Stock, 1,972,000 of which are issued and outstanding. In addition no
stock options are currently outstanding and all options have been exercised or
terminated. All of the issued and outstanding shares of capital stock have been
duly authorized, are validly issued, fully paid, and non-assessable, and are
held of record by the respective shareholders as set forth in Section 5.3(a) of
the Novo Disclosure Schedule. All of the outstanding shares of capital stock
have been offered, issued and sold by Novo in compliance with applicable Federal
and state securities laws. As of the Closing Date, the entire authorized capital
stock of Novo shall consist of 10,000,000 shares of Common Stock, 1,972,000 of
which shall be issued and outstanding. As of the Closing Date, all of the then
issued and outstanding shares of capital stock shall have been duly authorized,
shall be validly issued, fully paid, and non-assessable, and shall be held of
record by the respective shareholders as set forth in Section 5.3(a) of the Novo
Disclosure Schedule. As of the Closing Date, all of the then outstanding shares
of capital stock shall have been offered, issued and sold by Novo in compliance
with applicable Federal and state securities laws.
(b) No Other Rights or Agreements. As of the date of
this Agreement, Section 5.3(b) of the Novo Disclosure Schedule lists all of the
holders of options, warrants, purchase rights, subscription rights, conversion
rights, convertible debentures or other securities, exchange rights and other
rights that could require Novo to issue, sell or otherwise cause to become
outstanding any of its capital stock (the "STOCK RIGHTS"), and the number of
shares of Novo Common Stock subject to such Stock Rights. Except as set forth in
Section 5.3(b) of the Novo Disclosure Schedule, there are no other outstanding
or authorized Stock Rights. Except as set forth in Section 5.3(b) of the Novo
Disclosure Schedule, there are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to Novo.
There are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of the capital stock of Novo. All of the Novo Stock Rights
will be fully exercised or canceled prior to the Effective Time of the Merger.
As of the Effective Time of the Merger, there will be (i) no outstanding or
authorized Stock Rights, (ii) no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to Novo and
(iii) no voting trusts, proxies, or other agreements or understandings with
respect to the voting of the capital stock of Novo.
5.4 Noncontravention. Neither the execution and the delivery
of this Agreement by Novo nor the consummation by Novo of the transactions
contemplated hereby, will (A) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any government, governmental agency, or court to which Novo is subject or any
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<PAGE> 13
provision of its Articles of Incorporation or bylaws, or (B) (i) conflict with,
(ii) result in a breach of, (iii) constitute a default under, (iv) result in the
acceleration of, (v) create in any party the right to accelerate, terminate,
modify, or cancel, or (vi) except as set forth in Section 5.4 of the Novo
Disclosure Schedule, require any notice under, any agreement, contract, lease,
license, instrument, franchise permit or other arrangement to which Novo is a
party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest upon any of its assets).
5.5 Broker's Fees. Novo has no liability or obligation to
pay any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
5.6 Financial Statements. Section 5.6 of the Novo Disclosure
Schedule contains the following financial statements (collectively the
"FINANCIAL STATEMENTS"): (i) unaudited balance sheets and statements of income
and cash flows as of and for the fiscal year ended December 31, 1998 (the "MOST
RECENT FISCAL YEAR END") for Novo; and (ii) an unaudited balance sheet and
statements of income and cash flows (the "MOST RECENT FINANCIAL STATEMENTS") as
of and for the fiscal period ended March 31, 1999 and June 30, 1999 (the "MOST
RECENT FISCAL PERIOD ENDS") for Novo. The Financial Statements (including the
notes thereto) have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods covered thereby and present fairly the financial condition of Novo as of
such dates and the results of operations of Novo for such periods; provided,
however, that the Most Recent Financial Statements lack footnotes and certain
other presentation items and are subject to normal year end adjustments. Except
as set forth in Section 5.6 of the Novo Disclosure Schedule, the books of
account of Novo reflect as of the dates shown thereon all items of income and
expenses, and all assets, liabilities and accruals of Novo required to be
reflected therein, in accordance with generally accepted accounting principles
consistently applied.
5.7 Subsidiaries. Novo has a wholly subsidiary in Japan
called Zycad TSS KK and has not been a subsidiary of another company.
5.8 Title to Assets. Novo has good and marketable title to,
or a valid leasehold interest in, the properties and assets (including, without
limitation, all Intellectual Property) used by it, located on its premises, or
shown on the balance sheet contained within the Most Recent Financial Statements
(the "MOST RECENT BALANCE SHEET") or acquired after the date thereof, free and
clear of all Security Interests, except for properties and assets disposed of in
the Ordinary Course of Business since the date of the Most Recent Balance Sheet
and except as set forth in Section 5.8 of the Novo Disclosure Schedule. No
Person other than Novo will own at the time of the Closing any assets or
properties currently utilized in or necessary to the operations or business of
Novo or situated on any of the premises of Novo. There are no existing
contracts, agreements, commitments or arrangements with any Person to acquire
any of the assets or properties of Novo (or any interest therein) except for
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this Agreement.
5.9 Events Subsequent to Most Recent Fiscal Period End.
Since the Most Recent Fiscal Period End, there has not been any material adverse
change in the Business Condition of Novo, except as disclosed in Section 5.9 of
the Novo Disclosure Schedule. Without limiting the generality of the foregoing,
since that date:
(a) Novo has not sold, leased, transferred, or
assigned any assets or properties, tangible or intangible, outside the Ordinary
Course of Business;
(b) except for those agreements, contracts, leases
and commitments identified in Section 5.17 of the Novo Disclosure Schedule, Novo
has not entered into, assumed or become bound under or obligated by any
agreement, contract, lease or commitment (collectively a "NOVO AGREEMENT") or
extended or modified the terms of any Novo Agreement which (i) involves the
payment of greater than $10,000 per annum or which extends for more than one (1)
year, (ii) involves any payment or obligation to any Affiliate of Novo other
than in the Ordinary Course of Business, (iii) involves the sale of any material
assets, (iv) involves any OEM relationship, or (v) involves any license of
Novo's technology;
(c) to the knowledge of Novo, no party (including
Novo) has accelerated, terminated, made modifications to, or canceled any
agreement, contract, lease, or license to which Novo is a party or by which it
is bound and Novo has not modified, canceled or waived or settled any debts or
claims held by it, outside the Ordinary Course of Business, or waived or settled
any rights or claims of a substantial value, whether or not in the Ordinary
Course of Business;
(d) none of the assets of Novo, tangible or
intangible, has become subject to any Security Interest, except as set forth on
Section 5.8 of the Novo Disclosure Schedule;
(e) Novo has not made any capital expenditures
except in the Ordinary Course of Business and not exceeding $10,000 in the
aggregate of all such capital expenditures;
(f) Novo has not made any capital investment in, or
any loan to, any other Person;
(g) Novo has not created, incurred, assumed, prepaid
or guaranteed any indebtedness for borrowed money and capitalized lease
obligations, or extended or modified any existing indebtedness, except as
provided in Section 9.1(i) hereof;
(h) Novo has not granted any license or sublicense
of any rights under or with respect to any Intellectual Property;
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(i) there has been no change made or authorized in
the Articles of Incorporation or bylaws of Novo;
(j) Novo has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or other rights
to purchase or obtain (except upon the conversion, exchange or exercise of any
such securities which are described on Section 5.3 of the Novo Disclosure
Schedule) any of its capital stock;
(k) Novo has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock (whether in
cash or in kind) or redeemed, purchased, or otherwise acquired any of its
capital stock (other than with respect to any Dissenting Shares (as defined
herein));
(l) Novo has not experienced any damage,
destruction, or loss (whether or not covered by insurance) to its property in
excess of $10,000 in the aggregate of all such damage, destruction and losses;
(m) Novo has not suffered any repeated, recurring or
prolonged shortage, cessation or interruption of inventory shipments, supplies
or utility services;
(n) Novo has not made any loan to, or entered into
any other transaction with, or paid any bonuses in excess of an aggregate of
$10,000 to, any of its Affiliates, directors, officers, or employees or their
Affiliates, and, in any event, any such transaction was on fair and reasonable
terms no less favorable to Novo than would be obtained in a comparable arm's
length transaction with a Person which is not such a director, officer or
employee or Affiliate thereof;
(o) Novo has not entered into any employment
contract or collective bargaining agreement, written or oral, or modified the
terms of any existing such contract or agreement;
(p) Novo has not granted any increase in the base
compensation of any of its directors or officers, or, except in the Ordinary
Course of Business, any of its employees;
(q) Novo has not adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or other plan,
contract, or commitment for the benefit of any of its directors, officers, or
employees (or taken any such action with respect to any other Employee Benefit
Plan);
(r) Novo has not made any other change in employment
terms for any of
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its directors or officers, and Novo has not made any other change in employment
terms for any other employees outside the Ordinary Course of Business;
(s) Novo has not suffered any material adverse
change or any threat of any material adverse change in its relations with, or
any loss or threat of loss of, any of its major customers, distributors or
dealers;
(t) Novo has not suffered any material adverse
change or any threat of any material adverse change in its relations with, or
any loss or threat of loss of, any of it major suppliers;
(u) Novo has not received notice or had knowledge of
any actual or threatened labor trouble or strike, or any other occurrence, event
or condition of a similar character;
(v) Novo has not changed any of the accounting
principles followed by it or the method of applying such principles, except as
described on Schedule 5.6 of the Novo Disclosure Schedule;
(w) Novo has not made a change in any of its banking
or safe deposit arrangements;
(x) Novo has not entered into any transaction other
than in the Ordinary Course of Business; and
(y) Novo has not committed to any of the foregoing.
5.10 Undisclosed Liabilities. Except as disclosed in Section
5.1 of the Novo Disclosure Schedule, Novo has no material liability (whether
known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including any liability for taxes) of a
character which, under GAAP, should be accrued, shown or disclosed on a balance
sheet of Novo, except for (i) liabilities set forth on the Most Recent Balance
Sheet and (ii) liabilities which have arisen after the Most Recent Fiscal Period
End in the Ordinary Course of Business.
5.11 Legal Compliance. Novo has complied in all material
respects with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof). To
the knowledge of Novo, no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, notice or inquiry has been filed or commenced
by or against, or received by, any governmental body alleging any failure to so
comply. Novo has all licenses, permits,
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approvals, registrations, qualifications, certificates and other governmental
authorizations that are necessary for the operations of Novo as they are
presently conducted, except for any such licenses, permits, approvals,
registrations, qualifications, certificates and other governmental
authorizations which, if not obtained, would not individually or in the
aggregate be likely to result Material Adverse Effect on Novo.
5.12 Tax Matters.
(a) For purposes of this Agreement, "TAXES" means
all federal, state, municipal, local or foreign income, gross receipts, windfall
profits, severance, property, production, sales, use, value added, license,
excise, franchise, employment, withholding, capital stock, levies, imposts,
duties, transfer and registration fees or similar taxes or charges imposed on
the income, payroll, properties or operations of Novo, together with any
interest, additions or penalties, deficiencies or assessments with respect
thereto and any interest in respect of such additions or penalties.
(b) Novo has filed all reports and returns with
respect to any Taxes ("TAX RETURNS") that it was required to file. All such Tax
Returns were correct and complete in all material respects, and no such Tax
Returns are currently the subject of audit. All Taxes owed by Novo (whether or
not shown on any Tax Return) were paid in full when due or are being contested
in good faith and are supported by adequate reserves on the Most Recent
Financial Statements, except any state Taxes (other than California related
Taxes) which are not individually or in the aggregate material to Novo. Novo
has provided adequate reserves on its Financial Statements for the payment of
any taxes accrued but not yet due and payable. Novo is not currently the
beneficiary of any extension of time within which to file any Tax Return, and
Novo has not waived any statute of limitations in respect of Taxes or agreed to
any extension of time with respect to any Tax assessment or deficiency.
(c) There is no dispute or claim concerning any Tax
liability of Novo either (A) claimed or raised by any authority in writing or
(B) based upon personal contact with any agent of such authority. There are no
tax liens of any kind upon any property or assets of Novo, except for inchoate
liens for taxes not yet due and payable.
(d) Novo has not filed a consent under Sec. 341(f)
of the Internal Revenue Code of 1986, as amended (the "CODE") concerning
collapsible corporations. Novo has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under any
circumstances could obligate it to make any payments as a result of the
consummation of the Merger that will not be deductible under Code Sec. 280G.
Novo has not been a United States real property holding corporation within the
meaning of Code Sec. 897(c)(2) during the applicable period specified in Code
Sec. 897(c)(1)(A)(ii). Novo is not a party to any tax allocation or sharing
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agreement. Novo (A) has not been a member of any affiliated group within the
meaning of Code Sec. 1504 or any similar group defined under a similar provision
of state, local, or foreign law (an "AFFILIATED GROUP") filing a consolidated
federal Income Tax Return and (B) has no any liability for the taxes of any
Person under Treas. Reg. Section 1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or otherwise.
(e) The unpaid Taxes of Novo (A) did not, as of the
Most Recent Fiscal Period End, exceed by any amount the reserve for Tax
liability (other than any reserve for deferred taxes established to reflect
timing differences between book and tax income) set forth on the face of the
Most Recent Balance Sheet (rather than in any notes thereto) and (B) will not
exceed that reserve as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of Novo in filing
its Tax Returns.
5.13 Properties.
(a) Novo does not currently own and has never
previously owned any real property.
(b) Section 5.13 of the Novo Disclosure Schedule
lists and describes briefly all real property leased or subleased to Novo. Novo
has delivered to Aspec correct and complete copies of the leases and subleases
listed in Section 5.13 of the Novo Disclosure Schedule (as amended to date).
With respect to each lease and sublease listed in Section 5.13 of the Novo
Disclosure Schedule to the knowledge of Novo:
(i) the lease or sublease is legal, valid,
binding, enforceable, and in full force and effect in all respects;
(ii) no party to the lease or sublease is in
breach or default, and no event has occurred which, with notice or lapse of
time, would constitute a breach or default or permit termination, modification,
or acceleration thereunder;
(iii) no party to the lease or sublease has
repudiated any provision thereof;
(iv) there are no disputes, oral agreements,
or forbearance programs in effect as to the lease or sublease:
(v) Novo has not assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold; and
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(vi) all facilities leased or subleased
thereunder have received all approvals of governmental authorities (including
licenses and permits) required in connection with the operation thereof, and
have been operated and maintained in accordance with applicable laws, rules, and
regulations in all material respects.
5.14 Intellectual Property.
(a) To the knowledge of Novo, Novo has not
interfered with, infringed upon, misappropriated or violated any Intellectual
Property rights of third parties. Novo has not received since its inception any
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that Novo must
license or refrain from using any Intellectual Property rights of any third
party), except as disclosed in Section 5.14 of the Novo Disclosure Schedule. To
the knowledge of Novo, no third party has interfered with, infringed upon,
misappropriated, or violated any Intellectual Property rights of Novo. Each
employee of Novo has signed an invention assignment and/or confidentiality
agreement with Novo that provides that any Intellectual Property developed by
such employee while employed by Novo is the sole property of Novo.
(b) Section 5.14(b) of the Novo Disclosure Schedule
identifies (i) all Intellectual Property owned by Novo and (ii) each patent or
registration which has been issued to Novo or any Affiliate of Novo with respect
to any of the Intellectual Property used in Novo's business, (iii) each pending
patent application or application for registration which Novo or any Affiliate
of Novo has made with respect to any of the Intellectual Property used in Novo's
business, and (iv) each material license, agreement, or other permission which
Novo or any Affiliate of Novo has granted to any third party with respect to any
of the Intellectual Property used in Novo's business (together with any
exceptions). Novo has delivered to Aspec correct and complete copies of all such
patents, registrations, applications, licenses, agreements, and permissions (as
amended to date). Section 5.14(b) of the Novo Disclosure Schedule also
identifies (i) each trade name or unregistered trademark used by Novo or any
Affiliate of Novo which is material to the business of Novo and (ii) each
unregistered copyright or trade secret owned by Novo or any Affiliate of Novo
with respect to Intellectual Property which is material to the business of Novo.
With respect to each item of Intellectual Property required to be identified in
Section 5.14(b) of the Novo Disclosure Schedule, to the knowledge of Novo:
(i) Novo possesses all right, title, and
interest in and to the item, free and clear of any Security Interest (except as
disclosed in Section 5.8 of the Novo Disclosure Schedule), license or other
restriction;
(ii) the item is legal and valid and in full
force and effect and is not subject to any outstanding injunction, judgment,
order, decree, ruling, or charge;
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(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to the
knowledge of Novo, threatened which challenges the legality, validity,
enforceability, use or ownership of the item; and
(iv) Novo has never agreed to indemnify any
Person for or against any interference, infringement, misappropriation, or other
conflict with respect to the item, except pursuant to the contracts set forth in
Section 5.17 of the Novo Disclosure Schedule.
(c) Section 5.14(c) of the Novo Disclosure Schedule
identifies each material item of Intellectual Property that any third party owns
and that Novo uses pursuant to license, sublicense, agreement, or permission.
Novo has delivered to Aspec correct and complete copies of all such licenses,
sublicenses, agreements, and permissions (as amended to date). With respect to
each item of Intellectual Property required to be identified in Section 5.14(c)
of the Novo Disclosure Schedule, to the knowledge of Novo:
(i) the license, sublicense, agreement or
permission covering the item is legal, valid, binding, enforceable, and in full
force and effect in all material respects;
(ii) no party to the license, sublicense,
agreement, or permission is in breach or default, and, to the knowledge of Novo,
no event has occurred which with notice or lapse of time would constitute a
breach or default or permit termination, modification or acceleration
thereunder;
(iii) no party to the license, sublicense,
agreement, or permission has repudiated any provision thereof; and
(iv) Novo has not granted any sublicense or
similar right with respect to the license, sublicense, agreement, or permission.
5.15 Tangible Assets. The buildings, machinery, equipment,
and other tangible assets that Novo owns and leases are free from material
defects (patent and latent) and are in good operating condition and repair
(subject to normal wear and tear) and are usable in the Ordinary Course of
Business.
5.16 Inventory. In all material respects, all of the
inventory of Novo and any supplies, manufactured and processed parts, work in
process or finished goods, is usable, merchantable and fit for the purpose for
which it was procured or manufactured, and none of such inventory is
slow-moving, obsolete, damaged, or defective, subject to adjustments for
operations and transactions through the Closing Date in accordance with the past
custom and practice of Novo.
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5.17 Contracts. Section 5.17 of the Novo Disclosure Schedule
lists the following contracts, agreements, commitments and other arrangements to
which Novo is a party or by which Novo or any of its assets is bound:
(a) any agreement (or group of related agreements)
for the lease of personal property to or from any Person or license of any
software or Intellectual Property which involves the payment by or to Novo of
more than $10,000 per year;
(b) any agreement (or group of related agreements)
for the purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services, the
performance of which will extend over a period of more than one year or involve
consideration in excess of $10,000;
(c) any agreement for the purchase of supplies,
components, products or services from single source suppliers, custom
manufacturers or subcontractors which involves the payment by Novo of more than
$10,000 per year;
(d) any agreement concerning a partnership or joint
venture;
(e) any agreement (or group of related agreements)
under which it has created, incurred, assumed, or guaranteed any indebtedness
for borrowed money or any capitalized lease obligation in excess of $10,000 or
under which a Security Interest has been imposed on any of its assets, tangible
or intangible;
(f) any agreement concerning noncompetition or
restraint of trade or any agreement on currently active projects which involves
confidentiality;
(g) any agreement with any Novo shareholder or any
of such shareholder's Affiliates (other than Novo) or with any Affiliate of
Novo;
(h) any profit sharing, stock option, stock
purchase, stock appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors, officers or
employees;
(i) any collective bargaining agreement;
(j) any agreement for the employment of any
individual on a full-time, part-time, consulting, or other basis;
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(k) any agreement under which it has advanced or
loaned any amount to any of its directors, officers, and employees;
(l) any agreement pursuant to which Novo is
obligated to provide services, maintenance, support or training which involves
payments to Novo of more than $50,000 per year;
(m) any standard form agreement used by Novo,
including, but not limited to, any purchase order, statement of standard terms
and conditions of sale, or employment offer letter; and
(n) any other agreement (or group of related
agreements) the performance of which involves consideration in excess of $10,000
or which is expected to continue for more than six (6) months from the date
hereof.
Novo has delivered to Aspec a correct and complete copy of each written
agreement listed in Section 5.17 of the Novo Disclosure Schedule (as amended to
date) and a written summary setting forth the terms and conditions of each oral
agreement referred to in Section 5.17 of the Novo Disclosure Schedule. With
respect to each such agreement: (A) the agreement is legal, valid, binding,
enforceable, and in full force and effect in all respects against Novo and, to
the knowledge of Novo, the other parties thereto; (B) Novo is not and, to the
knowledge of Novo, no other party is in breach or default, and no event has
occurred, which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; (C) Novo has not and, to the knowledge of Novo, no other party has
repudiated any provision of the agreement; and (D) Novo does not have any reason
to believe that the service called for thereunder cannot be supplied in
accordance with its terms and without resulting in a loss to any of Novo.
5.18 Notes and Accounts Receivable. All notes and accounts
receivable of Novo, all of which are reflected properly on the books and records
of Novo in all material respects, are, to the knowledge of Novo, (i) valid
receivables subject to no setoffs, defenses or counterclaims, and are current
and collectible, and (ii) will be collected in accordance with their terms at
their recorded amounts, subject only to adjustments for operations and
transactions through the Closing Date in accordance with the past custom and
practice of Novo.
5.19 Power of Attorney. There are no outstanding powers of
attorney executed on behalf of Novo.
5.20 Insurance. Novo has delivered to Aspec copies of each
insurance policy (including policies providing property, casualty, liability,
and workers' compensation coverage and bond and surety arrangements) with
respect to which Novo is a party, a named insured, or otherwise the beneficiary
of coverage. With respect to each such insurance policy: (A) the policy is
legal, valid,
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binding, enforceable, and in full force and effect (and there has been no notice
of cancellation or nonrenewal of the policy received) with respect to Novo and,
to the knowledge of Novo, the other parties thereto; (B) neither Novo nor, to
the knowledge of Novo, any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; (C) neither Novo nor, to the knowledge of Novo,
any other party to the policy has repudiated any provision thereof; and (D)
there has been no failure by Novo to give any notice or present any claim under
the policy in due and timely fashion. Section 5.20 of the Novo Disclosure
Schedule describes any self-insurance arrangements presently maintained by Novo.
5.21 Litigation. Section 5.21 of the Novo Disclosure Schedule
sets forth each instance in which Novo (or any of its assets) (i) is subject to
any outstanding injunction, judgment, order, decree, ruling, or charge or (ii)
is a party or, to the knowledge of Novo, is threatened to be made a party, to
any action, suit, proceeding, hearing, arbitration, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. To the knowledge
of Novo, there are no facts or circumstances which would form the basis of any
claim against Novo, except as disclosed in Section 5.21 of the Novo Disclosure
Schedule.
5.22 Product Warranty. All of the services performed and
products licensed, manufactured, sold, leased, and delivered by Novo have
conformed in all material respects with all applicable contractual commitments
and all express and implied warranties, and, to the knowledge of Novo, Novo has
no liability (whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due) for replacement or repair thereof or other damages in
connection therewith, other than in the Ordinary Course of Business in an
aggregate amount not exceeding $10,000. Section 5.17(o) of the Novo Disclosure
Schedule includes copies of the standard terms and conditions of license for
Novo (containing applicable guaranty, warranty, and indemnity provisions).
5.23 Product Liability. To the knowledge of Novo, Novo has no
material liability (whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due) arising out of any injury to individuals or
property as a result of the ownership, possession, or use of any product
licensed, manufactured, sold, leased, or delivered by Novo.
5.24 Employees. No executive, key employee, or significant
group of employees has advised any executive officer of Novo that he, she or
they plan to terminate employment with Novo during the next six (6) months. Novo
is not a party to or bound by any collective bargaining agreement, nor has it
experienced any strike or grievance, claim of unfair labor practices, or other
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collective bargaining dispute. To the knowledge of Novo, Novo has not committed
any unfair labor practice. To the knowledge of Novo, there is no organizational
effort presently being made or threatened by or on behalf of any labor union
with respect to employees of Novo.
5.25 Employee Benefits.
(a) Section 5.25(a) of the Novo Disclosure Schedule
lists each Employee Benefit Plan that Novo maintains or to which Novo
contributes or is obligated to contribute.
(i) Each such Employee Benefit Plan (and
each related trust, or fund established by Novo) complies in form and in
operation in all material respects with their terms, the applicable requirements
of ERISA, the Code, and other applicable laws.
(ii) All required reports and descriptions
(including Form 5500 Annual Reports, Summary Annual Reports, PBGC-1's, and
Summary Plan Descriptions) have been filed or distributed appropriately with
respect to each such Employee Benefit Plan. The requirements of Code Sec. 4980B
have been met in all material respects with respect to each such Employee
Benefit Plan which is an Employee Welfare Benefit Plan. No event has occurred
and no condition exists with respect to any Employee Benefit Plan that would
subject Novo to any tax under Code Sections 4972, 4976 or 4979 or to a fine
under ERISA Sections 502(i) or 502(l).
(iii) All contributions, premiums or other
payments (including all employer contributions and employee salary reduction
contributions) which are due have been paid to each Employee Benefit Plan and
all contributions, premiums or other payments for any period ending on or before
the Closing Date which are not yet due shall been paid to each such Employee
Benefit Plan or shall be accrued in accordance with the custom and practice of
Novo.
(iv) Each such Employee Benefit Plan which is
an Employee Pension Benefit Plan and which is intended to qualify under Code
Sec. 401(a), has received a favorable determination letter from the Internal
Revenue Service with respect to the qualification of the plan under Code Section
401(a) and the exemption of any corresponding trust under Code Section 501,
unless the Internal Revenue Service is deemed to have approved the form of such
Plan under applicable IRS Revenue Procedures. A copy of such determination
letters have been provided to Aspec and nothing has occurred since the date of
each such determination letter that would cause such Employee Pension Benefit
Plan to lose its ability to rely on such letter. Each Employee Pension Benefit
Plan has been restated to comply with the 1986 Tax Reform Act and subsequent
applicable tax legislation to the extent required by governing tax law. A copy
of any determination letters applicable to such restatement which have been
received by Novo has been provided to Aspec.
(v) Neither Novo nor any other Person or
entity under common
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control with Novo within the meaning of Section 414(b), (c) or (m) of the Code
and the regulations thereunder has now or at any previous time, maintained,
established, sponsored, participated in, or contributed to, any Employee Pension
Benefit Plan that is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code. No Employee Welfare Benefit Plan or
other Employee Benefit Plan providing welfare benefits is funded with a trust or
other funding vehicle, other than insurance policies or contracts with a health
maintenance organization or similar health care delivery entity.
(vi) Novo has delivered to Aspec correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, if any,
the most recent Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and other funding agreements which implement each
maintained Employee Benefit Plan. The terms of any such documentation or other
communication do not prohibit Aspec from amending or terminating any such
Employee Benefit Plan.
(b) With respect to each Employee Benefit Plan that
Novo, and/or any controlled group of corporations within the meaning of Code
Sec. 1563 (a "CONTROLLED GROUP OF CORPORATIONS") which includes Novo, maintains
or ever has maintained or to which any of them contributes, ever contributed, or
ever has been required to contribute:
(i) There have been no prohibited
transactions within the meaning of ERISA Sec 406 and Code Sec. 4975 with respect
to any such Employee Benefit Plan. No fiduciary within the meaning of ERISA Sec.
3(21) (a "FIDUCIARY"), has any liability for breach of fiduciary duty or any
other failure to act or comply in connection with the administration or
investment of the assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing, or investigation with respect to the administration or the
investment of the assets of any such Employee Benefit Plan (other than routine
claims for benefits) is pending or threatened.
(c) Except as disclosed in Schedule 5.25(c) of the
Novo Disclosure Schedule, Novo does not maintain or contribute to, has never
maintained or contributed to, and has never been required to contribute to, any
Employee Welfare Benefit Plan or any other Employee Benefit Plan providing
medical, health, or life insurance or other welfare-type benefits for current or
future retired or terminated employees, their spouses, or their dependents
(other than in accordance with Code Sec. 4980B or Part 6 of Subtitle B of Title
I of ERISA).
(d) There is no liability in connection with any
Employee Benefit Plan that is not fully disclosed or provided for on the Most
Recent Balance Sheet for which disclosure would be required under generally
accepted accounting principles.
(e) No Employee Benefit Plan or Novo has any
liability to any plan
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participant, beneficiary or other person by reason of the payment of benefits or
the failure to pay benefits with respect to benefits under or in connection with
any such Employee Benefit Plan, other than claims in the normal administration
of such plans.
5.26 Guaranties. Novo is not a guarantor or otherwise
responsible for any liability or obligation (including indebtedness) of any
other Person.
5.27 Environment, Health, and Safety.
(a) For purposes of this Agreement, the following
terms have the following meanings:
"ENVIRONMENTAL, HEALTH, AND SAFETY LAWS" means any and
all federal, state, local or municipal laws, rules, orders, regulations,
statutes, ordinances, codes, plans, injunctions, judgments, decrees,
requirements or rulings now or hereafter in effect, imposed by any governmental
authority regulating, relating to, or imposing liability or standards of conduct
relating to pollution or protection of the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), public health and safety, or employee health and safety, concerning any
Hazardous Materials or Extremely Hazardous Substances, as such terms as defined
herein, or otherwise regulated, under any Environmental, Health and Safety Laws.
The term "ENVIRONMENTAL, HEALTH AND SAFETY LAWS" shall include, without
limitation, the Clean Water Act (also known as the Federal Water Pollution
Control Act), 33 U.S.C. Section 1251 et seq., the Toxic Substances Control Act,
15 U.S.C. Section 2601 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et
seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section
136 et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986,
Public Law 99-4, 99, 100 Stat. 1613, the Emergency Planning and Community Right
to Know Act, 42 U.S.C. Section 11001 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq., and the Occupational Safety and
Health Act, 29 U.S.C. Section 651 et seq., all as amended, together with any
amendments thereto, regulations promulgated thereunder and all substitutions
thereof.
"EXTREMELY HAZARDOUS SUBSTANCE" means a substance on the
list described in Section 302 (42 U.S.C. Section 11002(a)(2)) of the Emergency
Planning and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., as
amended.
"HAZARDOUS MATERIAL" means any material or substance
that, whether by its nature or use, is now or hereafter defined as a pollutant,
dangerous substance, toxic substance, hazardous waste, hazardous material,
hazardous substance or contaminant under any Environmental, Health and Safety
Laws, or which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and which is now or
hereafter regulated under any
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<PAGE> 27
Environmental, Health and Safety Laws, or which is or contains petroleum,
gasoline, diesel fuel or other petroleum hydrocarbon product.
(b) To the knowledge of Novo, each of Novo and its
predecessors and Affiliates (A) has complied with the Environmental, Health, and
Safety Laws (and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, directive or notice has been filed or commenced
against any of them alleging any such failure to comply), (B) has obtained and
been in substantial compliance with all of the terms and conditions of all
permits, licenses, certificates and other authorizations which are required
under the Environmental, Health, and Safety Laws, and (C) has complied in all
material respects with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules, and timetables
which are contained in the Environmental, Health, and Safety Laws.
(c) To the knowledge of Novo, Novo has no liability
(whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), and none of Novo and its predecessors and Affiliates has handled or
disposed of any Hazardous Materials or extremely Hazardous Substances, arranged
for the disposal of any Hazardous Materials or Extremely Hazardous Substances,
exposed any employee or other individual to any Hazardous Materials or Extremely
Hazardous Substances, or owned or operated any property or facility in any
manner that could give rise to any liability, for damage to any site, location,
surface water, groundwater, land surface or subsurface strata, for any illness
of or personal injury to any employee or other individual, or for any reason
under any Environmental, Health, and Safety Law.
(d) To the knowledge of Novo, no Extremely Hazardous
Substances are currently, or have been, located at, on, in, under or about all
properties and equipment used in the business of Novo and its predecessors and
Affiliates.
(e) To the knowledge of Novo, no Hazardous Materials
are currently located at, on, in, under or about all properties and equipment
used in the business of Novo and its predecessors and Affiliates in a manner
which violates any Environmental, Health and Safety Laws or which requires
cleanup or corrective action of any kind under any Environmental, Health and
Safety Laws.
5.28 Certain Business Relationships With Novo. Neither Novo
nor any director or officer of Novo, nor any member of their immediate families,
nor any Affiliate of any of the foregoing, owns, directly or indirectly, or has
an ownership interest in any business (corporate or otherwise) which is a party
to, or in any property which is the subject of, any business arrangement or
relationship of any kind with Novo.
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5.29 No Adverse Developments. To the knowledge of Novo, there
is no development (exclusive of general economic factors affecting business in
general) or threatened development affecting Novo (or affecting customers,
suppliers, employees, and other Persons which have relationships with Novo) that
(i) is having or is reasonably likely to have a Material Adverse Effect on Novo,
or (ii) would prevent Aspec from conducting the business of the Surviving
Corporation following the Closing in the manner in which it was conducted or
planned to be conducted by Novo prior to the Closing.
5.30 Full Disclosure. No representation or warranty in this
Section 5 or in any document delivered by Novo pursuant to the transactions
contemplated by this Agreement, and no statement, list, certificate or
instrument furnished to Aspec pursuant hereto or in connection with this
Agreement, when taken as a whole, contains any untrue statement of a material
fact, or omits to state any fact necessary to make any statement herein or
therein not materially misleading. There is no fact, development or threatened
development (excluding general economic factors affecting business in general)
known to Novo which Novo has not disclosed to Aspec and which is having or may
have a Material Adverse Effect on Novo. Novo has delivered to Aspec true,
correct and complete copies of all documents, including all amendments,
supplements and modifications thereof or waivers currently in effect thereunder,
described in the Novo Disclosure Schedule.
6. Representations and Warranties of Aspec. Aspec represents and
warrants to Novo that the statements contained in this Section 6 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 6), except as
set forth in the disclosure schedule delivered by Aspec to Novo on the date
hereof (and initialed by Aspec and Novo), a copy of which is attached hereto as
Exhibit D (referred to herein as the "ASPEC DISCLOSURE SCHEDULE"). The Aspec
Disclosure Schedule will be arranged in paragraphs corresponding to the numbered
paragraphs contained in this Section 6.
6.31 Organization, Qualification, and Corporate Power. Aspec
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Delaware. Aspec is duly authorized to conduct business
and is in good standing under the laws of each other jurisdiction where such
qualification is required. Aspec has full corporate power and authority, and has
all necessary and material licenses and permits, to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it.
6.32 Authorization. Aspec has full power and authority to
execute and deliver this Agreement and the Merger Agreement, and to consummate
the transactions contemplated hereunder and to perform its obligations hereunder
and no other proceedings on the part of Aspec is necessary to authorize the
execution, delivery and performance of this Agreement and the Merger Agreement.
This Agreement and the Merger Agreement and the transactions contemplated
thereby have been
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approved by the unanimous vote of Aspec's Board of Directors. This Agreement and
the Merger Agreement constitute the valid and legally binding obligations of
Aspec enforceable against Aspec in accordance with their respective terms and
conditions. Aspec need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental agency
in order to consummate the transactions contemplated by this Agreement.
6.33 Capitalization.
(a) As of May 31, 1999, the authorized capital stock
of Aspec consisted of (i) 75,000,000 shares of Common Stock, of which 28,066,000
shares were issued and outstanding, (iii) 5,000,000 shares of undesignated
preferred stock, none of which were issued and outstanding, and (iv) an
aggregate of approximately 2,773,150 shares were subject to outstanding options
or reserved for issuance pursuant to Aspec's employee and director stock plans.
All of the outstanding shares of Aspec's capital stock have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
this Section 6.3, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of Aspec or obligating Aspec to issue or sell any shares of
capital stock of, or other equity interests in, Aspec. The authorized capital
stock of Merger Sub consists of 1,000 shares of common stock, all of which are
held of record by Aspec.
(b) The shares of Aspec Common Stock to be issued
pursuant to Section 3.1 of this Agreement are duly authorized and reserved for
issuance, and upon issuance thereof will be validly issued, fully paid and
nonassessable.
6.34 Noncontravention. Neither the execution and the delivery
of this Agreement nor the consummation of the transactions contemplated hereby,
will (A) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Aspec is subject or any provision of its
Certificate of Incorporation or bylaws, or (B) (i) conflict with, (ii) result in
a breach of, (iii) constitute a default under, (iv) result in the acceleration
of, (v) create in any party the right to accelerate, terminate, modify, or
cancel, or (vi) require any notice under, any agreement, contract, lease,
license, instrument, or other arrangement to which Aspec is a party or by which
it is bound or to which any of its assets is subject.
6.35 Brokers' Fees. Aspec has no liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
6.36 SEC Filings. ASPEC has filed all forms, reports and
documents required to be filed with the SEC since April 1, 1998, and has made
available to Novo such forms, reports and
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documents in the form filed with the SEC. All such required forms, reports and
documents (including those that ASPEC may file subsequent to the date hereof)
are referred to herein as the "ASPEC SEC Reports". As of their respective dates,
the ASPEC SEC Reports (i) were prepared in accordance with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such ASPEC SEC Reports, and (ii)
did not at the time they were filed (or if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. None of ASPEC's subsidiaries is required to file any forms, reports
or other documents with the SEC.
6.37 Financial Statements. Each of the consolidated
financial statements (including, in each case, any related notes thereto)
contained in ASPEC SEC Reports ( the "ASPEC Financials"), including any ASPEC
SEC Reports filed after the date hereof until the Closing, (i) was compiled as
to form in all material respects with the published rules and regulations of the
SEC with respect thereto, (ii) was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited interim financial statements, as
may be permitted by the SEC on Form 10-Q under the Exchange Act) and (iii)
fairly presented the consolidated financial position of ASPEC and it's
subsidiaries as at the respective dates thereof and the consolidated results of
ASPEC's operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments. The balance sheet of ASPEC contained in ASPEC
SEC Form 10Q Report as of May 31, 1999 is hereinafter referred to as the "ASPEC
Balance Sheet."
6.38 Litigation. Section 6.8 of the Aspec Disclosure Schedule
sets forth each instance in which Aspec (or any of its assets) (i) is subject to
any outstanding injunction, judgment, order, decree, ruling, or charge or (ii)
is a party or, to the knowledge of Aspec, is threatened to be made a party, to
any action, suit, proceeding, hearing, arbitration, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator.
6.9 No Adverse Developments. To the knowledge of Aspec,
there is no development (exclusive of general economic factors affecting
business in general) or threatened development affecting Aspec (or affecting
customers, suppliers, employees, and other Persons which have relationships with
Aspec) that (i) is having or is reasonably likely to have a Material Adverse
Effect on Aspec, or (ii) would prevent Aspec from conducting its business
following the Closing in the manner in which it was conducted or planned to be
conducted by Aspec prior to the Closing.
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7. Pre-Closing Covenants. With respect to the period between the
execution of this Agreement and the earlier of the termination of this Agreement
in accordance with Section 11 hereof and the Effective Time of the Merger:
7.1 General. Each of the Parties will use their reasonable
best efforts to take all actions and to do all things necessary, proper, or
advisable in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
closing conditions set forth in Section 9 below).
7.2 Notices and Consents. Except as otherwise agreed to by
Aspec, Novo will give any notices to third parties and will use its best efforts
to obtain any third party consents that are required in connection with the
matters identified in Section 5.4 of the Novo Disclosure Schedule. Each of the
Parties will give any notices to, make any filings with, and use its best
efforts to obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters identified in Section 5.4
of the Novo Disclosure Schedule.
7.3 Conduct of Business. Novo will not engage in any
practice, take any action, or enter into any transaction outside the Ordinary
Course of Business. Without limiting the generality of the foregoing, Novo will
not (a) issue or sell, or contract to issue or sell, any shares of its capital
stock or that of any of its subsidiaries or any securities convertible into to
exchangeable for shares of capital stock of it or any of its subsidiaries, or
securities, warrants, options or rights to purchase any of the foregoing (other
than shares issued upon exercise of outstanding options or upon the conversion
of outstanding convertible securities described on the Novo Disclosure
Schedule), (b) purchase or redeem any shares of its capital stock, (c) declare
or pay any dividends or agree to make any other distribution with respect to any
shares of its capital stock, (d) amend its Articles of Incorporation or Bylaws,
or (e) enter into or propose to enter into an agreement with any other person
providing for the possible acquisition by it or any of its subsidiaries (whether
by way of merger, purchase of capital stock, purchase of assets or otherwise) of
any material portion of the capital stock or assets of another entity. In
addition, Novo will comply with all laws, statutes, ordinances, rules,
regulations and orders applicable to it or to the conduct of its business,
except for violations that could not subject Novo to a penalty or loss that
could constitute a Material Adverse Effect on Novo.
7.4 Preservation of Business. Novo will use its best efforts
to keep its business and properties substantially intact, including its present
operations, physical facilities, working conditions, and relationships with
lessors, licensors, suppliers, customers and employees. Aspec will use its best
efforts to keep its business and properties substantially intact, including its
present operations, physical facilities, working conditions, and relationships
with lessors, licensors, suppliers, customers and employees.
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7.5 Access to Information. Novo will permit Aspec and its
representatives to have access at all reasonable times, and in a manner so as
not to interfere with the normal business operations of Novo, to the business
and operations of Novo. Neither such access, inspection and furnishing of
information to Aspec and its representatives, nor any investigation by Aspec and
its representatives, shall in any way diminish or otherwise effect Aspec's right
to rely on any representation or warranty made by Novo hereunder. Aspec will
permit Novo and its representatives to have access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of Aspec,
to the business and operations of Aspec. Neither such access, inspection and
furnishing of information to Novo and its representatives, nor any investigation
by Novo and its representatives, shall in any way diminish or otherwise effect
Novo's right to rely on any representation or warranty made by Aspec hereunder.
7.6 Notice of Developments. Each Party will give prompt
written notice to the others of any adverse development causing a material
breach of any of its own representations and warranties in Section 5 or Section
6 above. No disclosure by any Party pursuant to this Section 7.6, however, shall
be deemed to amend or supplement the Novo Disclosure Schedule or the Aspec
Disclosure Schedule or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant.
7.7 Exclusivity. From and after the date hereof through the
date which is thirty (30) days following the termination of this Agreement
pursuant to Section 11 hereof, without the prior written consent of Aspec,
neither Novo nor any of Novo's other officers, directors, shareholders, agents
or Affiliates shall, directly or indirectly, (a) solicit, conduct discussions
with or engage in negotiations with any person, other than Aspec, relating to
the possible acquisition of Novo or any of its subsidiaries (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its or their capital stock or assets, (b) provide
information with respect to Novo or any of its subsidiaries to any person, other
than Aspec, relating to the possible acquisition of Novo or any of its
subsidiaries (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise) or any material portion of its or their capital stock or
assets, (c) enter into an agreement with any person, other than Aspec, providing
for the acquisition of Novo or any of its subsidiaries (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its or their capital stock or assets, (d) make or authorize
any statement, recommendation or solicitation in support of any possible
acquisition of Novo or any of it subsidiaries (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets by any person, other than by
Aspec, (e) enter into any agreement with any person, other than Aspec, providing
for any extension of credit (other than trade credit in the ordinary course of
business) or other debt investment in Novo, or (f) enter into any additional
agreement for the licensing or distribution of products, technology, or
intellectual property of Novo, whether now existing or hereafter created. In
addition to the foregoing, if Novo or any of its subsidiaries receives any
unsolicited offer or proposal to enter negotiations relating to any
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of the above, Novo shall immediately notify Aspec thereof, including information
as to the identity of the offeror or the party making any such offer or proposal
and the specific terms of such offer or proposal, as the case may be. From and
after the date hereof until the first to occur of the Closing of the Merger or
the termination of this Agreement pursuant to Section 11 hereof, no shareholders
will transfer or offer to transfer any of their Novo Common Stock except to
Aspec pursuant to the Merger.
8. Post-Closing Covenants. With respect to the period following the
Effective Time of the Merger:
8.1 General. In case at any time after the Effective Time of
the Merger any further action is necessary to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor under
Section 10 below).
8.2 Litigation Support. In the event and for so long as any
Party actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction (A) on or
prior to the Effective Time of the Merger involving Novo or (B) arising out of
Aspec's operation of the business of the Surviving Corporation following the
Effective Time of the Merger in the manner in which it is presently conducted
and planned to be conducted, each of the other Parties will cooperate with the
party, its counsel in the contest or defense, make available their personnel,
and provide such testimony and access to their books and records as shall be
reasonably necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party (unless the contesting or
defending Party is entitled to indemnification therefor under Section 10 below).
8.3 Transition. None of the current officers of Novo will
take any action that is designed or intended to have the effect of discouraging
any lessor, licensor, customer, supplier, or other business associate of Novo
from maintaining the same business relationships with the Surviving Corporation
after the Effective Time of the Merger as it maintained with Novo prior to the
Effective Time of the Merger.
8.4 Confidentiality. Each of the parties hereto hereby
agrees to keep such information or knowledge obtained in any due diligence or
other investigation pursuant to the negotiation and execution of this Agreement
or the effectuation of the transactions contemplated hereby, confidential.
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8.5 Novo Employees; Employee Stock Options. Upon the
Effective Date of the Merger, all employees of Novo shall be offered employment
with the Surviving Corporation. In addition, upon the Effective Date of the
Merger, Novo employees and certain future employees shall be granted options to
purchase an aggregate of 500,000 shares of Aspec Common Stock (in such amounts
to be mutually determined by the Chief Executive Officer of Novo and Aspec). In
each case, such options shall be granted at the fair market value of the Aspec
Common Stock at the date of grant and shall vest monthly over a four-year
period. The options shall also be subject to the other terms and conditions of
Aspec's 1996 Stock Option Plan (the "STOCK PLAN"). All employees of Novo that
are employees of the Surviving Corporation following the Closing shall execute
Aspec's standard form of employee confidentiality and inventions assignment
agreement.
9. Conditions to Obligations to Close.
9.1 Conditions to Aspec's Obligation to Close. The
obligations of Aspec to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the following
conditions:
(a) the representations and warranties of Novo set
forth in Section 5 above shall be true and correct in all material respects at
and as of the Closing Date;
(b) Novo shall have performed and complied with all
of its respective covenants hereunder in all material respects through the
Closing;
(c) Novo shall have signed the CVI License Agreement
with Sun Microsystems with terms and in a form acceptable to Aspec and shall
have obtained such of the third party consents listed on Section 5.4 of the Novo
Disclosure Schedule as may be mutually agreed to by Aspec and Novo;
(d) no action, suit, or proceeding shall be pending
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator (other than such
an action initiated by Aspec or Merger Sub) wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (A) prevent consummation of any
of the transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) affect materially and adversely the right of Aspec or
Merger Sub to control Novo following the Effective Time of the Merger, and no
law, statute, ordinance, rule, regulation or order shall have been enacted,
enforced or entered which has caused or will likely cause any of the effects
under clause (A), (B) or (C) of this Section 9.1(d) to occur.
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<PAGE> 35
(e) the President and the Chief Financial Officer of
Novo shall have delivered to Aspec a certificate to the effect that each of the
conditions specified above in Section 9.1(a) to 9.1(d) (inclusive) is satisfied
in all material respects;
(f) No Material Adverse Effect shall have occurred
with respect to Novo;
(g) Aspec shall have received from counsel to Novo
an opinion in form and substance as set forth in Exhibit E attached hereto,
addressed to Aspec, and dated as of the Closing Date;
(h) this Agreement and the Merger shall have been
approved by the vote of the holders of 100% of the outstanding shares of Common
Stock of Novo.
(i) all outstanding options, convertible securities
and other Stock Rights to purchase securities of Novo shall have been exercised
or canceled; and
(j) John Walsh, Mike Hannig, Dave Allenbaugh and
Vivek Prasad shall have executed an employment agreement and accepted employment
with the Surviving Corporation.
Aspec may waive any condition (in whole or in part) specified in
this Section 9.1 if it executes a writing so stating at or prior to the Closing.
9.2 Conditions to Novo's Obligation. The obligation of Novo
to consummate the transactions to be performed by each of them in connection
with the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties of Aspec set
forth in Section 6 above shall be true and correct in all material respects at
and as of the Closing Date;
(b) Aspec shall have performed and complied with all
of its covenants hereunder in all material respects through the Closing;
(c) no action, suit, or proceeding shall be pending
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator (other than such
an action initiated by Novo ) wherein an unfavorable injunction, judgment,
order, decree, ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation (and no
such injunction, judgment, order, decree, ruling, or charge shall be in effect);
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<PAGE> 36
(d) the Chief Executive Officer or other duly
authorized officer of Aspec shall have delivered to Novo a certificate to the
effect that each of the conditions specified above in Section 9.2(a) to 9.2(c)
(inclusive) is satisfied in all material respects;
(e) Novo shall have received from counsel to Aspec
an opinion in form and substance as set forth in Exhibit F attached hereto,
addressed to Novo, and dated as of the Closing Date;
(f) No Material Adverse Change shall have occurred
with respect to Aspec.
Novo may waive any condition (in whole or in part) specified in
this Section 9.2 if Novo executes a writing so stating at or prior to the
Closing.
10. Survival of Representations, Indemnification.
10.1 Limited Survival of Representations and Warranties. All
covenants of Aspec, Merger Sub and Novo to be performed prior to the Effective
Time of the Merger, and all representations and warranties of Aspec, Novo in
this Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Merger for a period of one year from the Effective Time of the
Merger (the "EXPIRATION DATE"), and, notwithstanding anything to the contrary in
this Agreement, no claim for breach of any representation, warranty or covenant
by any Party and no claim for indemnification by Aspec hereunder shall be
brought at any time after the Expiration Date.
10.2 Indemnification by Aspec.
(a) From and after the Effective Time of the Merger,
Aspec shall indemnify and hold harmless each of the former Novo Shareholders in
proportion to their individual holdings in Novo at the date of the Merger and
each of the heirs, executors, successors and assigns of any of the foregoing,
from and against any and all Losses arising out of, or in connection with, any
breach of any representation or warranty or of any covenant, agreement, or
undertaking made by Aspec in this Agreement.
10.3 Indemnification by Novo Shareholders, Shares in Escrow.
(a) From and after the Effective Time of the Merger,
each of the Novo Shareholders shall indemnify and hold harmless Aspec, Merger
Sub and each of their respective
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<PAGE> 37
Affiliates, and each of their respective directors, officers, employees and
agents, and each of the heirs, executors, successors and assigns of any of the
foregoing, from and against any and all Losses arising out of, or in connection
with, any breach of any representation or warranty or of any covenant,
agreement, or undertaking made by Novo in this Agreement. The liability of the
Novo Shareholders hereunder shall be several in proportion to number of shares
of Aspec Common Stock received by each such Novo Shareholder and his Affiliates
as a result of the Merger, and not joint.
(b) Ten percent (10%) of the Aspec Shares issued to
the Novo Shareholders shall be placed in escrow for a period of twelve (12)
months to satisfy any claim for indemnification pursuant to this Section 10.
Notwithstanding any provision to the contrary in this Agreement, the maximum
obligation and liability of each of the Novo Shareholders hereunder shall be
limited to the forfeiture to Aspec of escrowed shares of Aspec Common Stock. Any
shares of Aspec Common Stock returned to Aspec shall be valued at the then fair
market value of the Aspec Common Stock.
(c) Any payment made pursuant to this Section 10.3
or Section 10.2 hereof shall be treated by the Parties as an adjustment to the
purchase price provided for herein, and the Parties agree not to take any
position inconsistent therewith for any purpose.
10.4 Notice of Claims. No action or proceeding may be brought
by a party seeking indemnification hereunder (the "INDEMNIFIED PARTY") with
respect to any breach of the representations, warranties, covenants or
agreements made hereunder unless written notice thereof, setting forth in
reasonable detail (to the extent then known) the amount of the claim and the
claimed misrepresentation or breach of warranty or breach of covenant or
agreement, or the reasons for which such Indemnified Party believes there has
been or may have been a breach of representation, warranty, covenant or
agreement, shall have been delivered to the party alleged to have breached such
representation, warranty, covenant or agreement (the "INDEMNIFYING PARTY") on or
prior to the Expiration Date. If the Indemnifying Party contests the assertion
of the claim, then the parties shall act in good faith to reach agreement
regarding such claim.
10.5 Third Party Claims. If a claim by a third party is made
against an Indemnified Party, and if such Indemnified Party intends to seek
indemnity with respect thereto under this Section 10, such Indemnified Party
shall promptly notify the Indemnifying Party in writing of such claims setting
forth such claims in reasonable detail; provided, however, that failure of such
Indemnified Party to give such notice shall not result in a waiver of its
indemnity rights except to the extent that such failure prejudices the
Indemnifying Party's ability to respond to or defend the claim. The Indemnifying
Party shall have thirty (30) days after receipt of such notice to undertake,
through counsel of its own choosing and at its own expense, the settlement or
defense thereof, and the Indemnified Party shall cooperate with it in connection
therewith; provided, however, that the Indemnified Party may participate in such
settlement or defense through counsel chosen by such
PAGE 37
<PAGE> 38
Indemnified Party, provided that the fees and expenses of such counsel shall be
borne by such Indemnified Party. The Indemnified Party shall not pay or settle
any claim without the written consent of the Indemnifying Party, which consent
shall not be unreasonably withheld. The Indemnifying Party will not pay or
settle any claim unless it contains an unconditional release of the Indemnified
Party. If the Indemnifying Party does not within thirty (30) days after the
receipt of the Indemnified Party's notice of a claim of indemnity hereunder
undertake the defense thereof or if the Indemnified Party must obtain separate
legal counsel due to an actual or potential conflict arising from such claim (as
determined in good faith by the Indemnified Party's legal counsel), the
Indemnified Party shall have the right to contest, settle or compromise the
claim but shall not thereby waive any right to indemnity therefor (and for all
associated reasonable costs and attorney's fees which, in the case of such costs
and fees, shall be reimbursed by the Indemnifying Party as incurred) pursuant to
this Agreement.
10.6 Limitation of Claims. The Novo Shareholders shall not be
liable for any claims by Aspec made hereunder unless and until the aggregate
amount of all such exceeds $10,000, provided that in the event such claims
exceed $10,000, Aspec shall be entitled to recover for the full amount of such
claims (including the $10,000 limitation). Aspec and Merger Sub shall not be
liable for any claims by the Novo Shareholders made hereunder unless and until
the aggregate amount of all such claims against Aspec and Merger Sub exceeds
$10,000, provided that in the event such claims exceed $10,000, the Novo
Shareholders shall be entitled to recover for the full amount of such claims
(including the $10,000 limitation).
11. Termination.
11.1 Termination of the Agreement. This Agreement may be
terminated at any time prior to the Closing as follows:
(a) Aspec and Novo may terminate this Agreement as
to all Parties by mutual written consent at any time prior to the Closing.
(b) Aspec may terminate this Agreement by giving
written notice to Novo at any time prior to the Closing (A) in the event Novo
has materially breached any representation, warranty, or covenant contained in
this Agreement and Aspec has notified Novo of the breach or (B) if the Closing
shall not have occurred on or before September 30, 1999, by reason of the
failure of any condition precedent under Section 9.1 hereof (unless the failure
results primarily from Aspec itself materially breaching any representation,
warranty, or covenants contained in this Agreement).
(c) Aspec may terminate this Agreement by giving
written notice to Novo at any time prior to 5:00 p.m. (California time) on the
date that the CVI License Agreement is signed
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<PAGE> 39
with Sun Microsystems in the event that Aspec is not satisfied in its sole
discretion with the results of its due diligence investigation regarding the
business and financial and corporate records of Novo.
(d) Novo may terminate this Agreement by giving
written notice to Aspec at any time prior to the Closing (A) in the event Aspec
has materially breached any representation, warranty, or covenant contained in
this Agreement and Novo has notified Aspec of the breach, or (B) if the Closing
shall not have occurred on or before September 30, 1999, by reason of the
failure of any condition precedent under Section 9.2 hereof (unless the failure
results primarily from Novo materially breaching any representation, warranty,
or covenants contained in this Agreement).
11.2 Effect of Termination.
(a) If any Party terminates this Agreement pursuant to Section 11
above, all rights and obligations of the Parties hereunder shall terminate
without any liability of any Party to any other Party (except for any liability
of any Party then in breach); provided, however, that the Confidentiality
Agreement shall survive in accordance with its terms.
(b) In the event that Aspec terminates this Agreement without cause
prior to Closing but after the date that the CVI license agreement is signed
with Sun Microsystem, Aspec agrees to pay NOVO the sum of $200,000 in return for
a 5% equity interest in NOVO. In the event that Aspec fails to fund the Novo
business operations in accordance with the agreed upon business plan during a
period of 4 years after Closing, Novo has the option for a period of 60 days to
tender back to Aspec all 1,600,000 shares of Aspec Common Stock in exchange for
an 81% of the issued and outstanding shares of Novo Common Stock.
12. Miscellaneous.
12.1 Publicity. No Party shall issue any press release or
make any public announcement relating to the subject matter of this Agreement
prior to the Closing without the prior written approval of Aspec and Novo.
Notwithstanding the foregoing, Aspec may disclose the Merger in its filings with
the Securities and Exchange Commission to the extent required by applicable
securities laws.
12.2 No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties, the
shareholders of Novo and their respective successors and permitted assigns.
12.3 Entire Agreement. This Agreement (including the exhibits
and schedules hereto) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof (including that certain letter agreement between Aspec and
PAGE 39
<PAGE> 40
Novo dated June 29, 1999). Notwithstanding the foregoing, Novo and Aspec agree
that the terms of the Confidentiality Agreement shall remain in effect.
12.4 Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the Parties named herein and their
respective successors and permitted assigns. No Party may assign either this
Agreement or any of its rights, interests, or obligations hereunder without the
prior written approval of the other Parties.
12.5 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
12.6 Headings. The Section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
12.7 Notices. All notices and other communications required
or permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one (1) business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
(1) business day after the business day of facsimile transmission, if delivered
by facsimile transmission with copy by first class mail, postage prepaid, and
shall be addressed to the intended recipient as set forth below:
If to Aspec or Merger Sub:
Aspec Technology, Inc.
830 East Arques Avenue
Sunnyvale, California 94086
Attention: Douglas E. Klint, President and Chief Executive
Officer
Copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: J. Robert Suffoletta, Esq.
If to Novo :
PAGE 40
<PAGE> 41
Novo Systems Corporation
4061 Clipper Court
Fremont, California 94538
Attention: John Walsh, President and Chief Executive
Officer
Copy to:
Donal Casey Cummins
Cummins & Holmes
18 Crow Canyon Court, Suite 390
San Ramon, CA 94563
Any Party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other
Parties written notice of such change in accordance with the above provisions.
12.8 Governing Law; Dispute Resolution.
(a) This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of California
without giving effect to any choice or conflict of law provision or rule
(whether of the State of California or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
California.
(b) It is the express intention of the Parties to
this Agreement to make a good faith effort to resolve, without resort to
arbitration, any dispute arising under or related to this Agreement. In the
event of a dispute relating to any provision of this Agreement which cannot be
resolved promptly by negotiations between the Parties involved directly in the
dispute, any Party to the dispute may give the other Party written notice of its
intent to arbitrate, as provided in this Section 12.8. No arbitration may
commence earlier than thirty (30) days after the delivery of the notice of
intent to arbitrate, unless the failure to commence arbitration is reasonably
likely to result in some demonstrable harm.
(c) The Parties hereto agree that the appropriate
and exclusive forum for any disputes among any of the Parties hereto arising out
of this Agreement or the transactions contemplated hereby, shall be settled by
arbitration in Santa Clara County, California, in accordance with the rules of
the American Arbitration Association, and judgment upon any award rendered by
the arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitration panel will consist of three (3) people to be mutually
selected by the Parties to the dispute. In the event that the Parties to the
dispute cannot agree upon the arbitrators within ten (10) days after the
PAGE 41
<PAGE> 42
commencement of the arbitration procedures, one (1) arbitrator shall be selected
by Aspec, one (1) arbitrator shall be selected by the Novo Shareholders involved
in the dispute and one (1) arbitrator shall be selected by the two (2) other
arbitrators so designated. The parties further agree, to the extent permitted by
law, that final and non-appealable judgment against any of them in any action or
proceeding contemplated above shall be conclusive and may be enforced in any
other jurisdiction within or outside the United States by suit on the judgment,
a certified or exemplified copy of which shall be conclusive evidence of the
fact and amount of such judgment. The Parties hereby consent to the jurisdiction
of the Superior Court of the State of California and the United States District
Courts of California and waive any objections or rights as to forum
nonconvenience, lack of personal jurisdiction or similar grounds with respect to
the enforcement of any such judgment.
(d) In the event of any arbitration proceeding
hereunder, the arbitrator(s) shall have the discretion to award the prevailing
party reimbursement of all costs and expenses incurred in connection with said
action, including reasonable attorney's fees.
(e) To the extent that Aspec or the Novo
Shareholders have or hereafter may acquire any immunity from jurisdiction of any
court or from any legal process (whether through service or notice, attachment
prior to judgment, attachment in aid of execution, execution or otherwise) with
respect to itself or its property, Aspec and the Novo Shareholders (as the case
may be) hereby irrevocably waive such immunity in respect of its obligations
with respect to this Agreement.
12.9 Amendments and Waivers. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
Aspec, Merger Sub and Novo. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent
occurrence.
12.10 Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
12.11 Expenses. Each of Aspec and Novo will bear its or their
own costs and expenses (including legal and accounting fees and expenses)
incurred in connection with this Agreement and the transactions contemplated
hereby; provided, however, that Novo will be responsible for (i) any brokers',
finders' or advisory fees payable on behalf of Novo in connection with the
Agreement and the transactions contemplated hereby, and (ii) any legal or
accounting fees undertaken on behalf of Novo in connection with the Agreement
and the transactions contemplated hereby in excess of $50,000 which may be paid
by Novo.
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<PAGE> 43
12.12 Construction. The Parties have participated jointly in
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
12.13 Incorporation of Exhibits and Schedules. The Exhibits
identified in this Agreement are incorporated herein by reference and made a
part hereof.
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<PAGE> 44
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
as of the date first above written.
Aspec: ASPEC TECHNOLOGY, INC.
By:
-----------------------------------
Douglas E. Klint
President and Chief Executive
Officer
Merger Sub: ASPEC ACQUISITION THREE CORPORATION
By:
-----------------------------------
Conrad J. Dell'Oca
President
Novo: NOVO SYSTEMS CORPORATION
By:
-----------------------------------
John R. Walsh
President and Chief Executive
Officer
PAGE 44
<PAGE> 45
[AGREEMENT AND PLAN OF REORGANIZATION SIGNATURE PAGE]
PAGE 45
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No.333-61607 ) of Aspec Technology, Inc. of our report
dated February 24, 2000 relating to the financial statements and financial
statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
March 2, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 23,884
<SECURITIES> 0
<RECEIVABLES> 2,399
<ALLOWANCES> (1,229)
<INVENTORY> 92
<CURRENT-ASSETS> 29,140
<PP&E> 18,924
<DEPRECIATION> (12,473)
<TOTAL-ASSETS> 45,759
<CURRENT-LIABILITIES> 9,494
<BONDS> 0
0
0
<COMMON> 91,551
<OTHER-SE> (55,610)
<TOTAL-LIABILITY-AND-EQUITY> 44,759
<SALES> 7,463
<TOTAL-REVENUES> 7,463
<CGS> 13,379
<TOTAL-COSTS> 13,379
<OTHER-EXPENSES> 21,377
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (26,257)
<INCOME-TAX> 41
<INCOME-CONTINUING> (26,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,298)
<EPS-BASIC> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
