<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 000-22565
INGENUUS CORPORATION.
(FORMERLY ASPEC TECHNOLOGY, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0298386
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
830 E. ARQUES AVENUE, SUNNYVALE, CA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 774-2199
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of
August 31, 2000 was 36,742,573.
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<PAGE> 2
INGENUUS CORPORATION.
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 1
a) Condensed Consolidated Statements of Operations for the
three and nine months ended August 31, 2000 and 1999........ 1
b) Condensed Consolidated Balance Sheets at August 31, 2000
and November 30, 1999.................................... 2
c) Condensed Consolidated Statements of Cash Flows for the
Nine months ended August 31, 2000 and 1999.................. 3
d) Notes to Condensed Consolidated Financial Statements..... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Continuing and Discontinued Operations....... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 23
SIGNATURES........................................................... 24
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INGENUUS CORPORATION.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue........................................... $ 1,211 $ -- $ 2,797 $ --
Cost of revenue................................... 638 -- 1,960 --
------- ------- -------- --------
Gross profit................................. 573 -- 837 --
------- ------- -------- --------
Operating expenses:
Research and development........................ 971 -- 2,918 --
Sales and marketing............................. 853 -- 1,773 --
General and administrative...................... 1,042 613 5,188 2,654
Write-off in process research and development... -- -- 925 --
Amortization -- goodwill........................ 1,223 -- 3,700 --
------- ------- -------- --------
Total operating expenses................ 4,089 613 14,504 2,654
Loss from operations.............................. (3,516) (613) (13,667) (2,654)
Interest and other income, net.................... 242 348 645 1,270
Equity losses from joint venture.................. -- (170) (67) (585)
------- ------- -------- --------
Loss from continuing operations................... (3,274) (435) (13,089) (1,969)
Loss from discontinued operations................. -- (4,636) (3,623) (13,697)
(Loss)/gain on disposal of discontinued
operations...................................... (70) -- 5,363
------- ------- -------- --------
Net loss.......................................... $(3,344) $(5,071) $(11,349) $(15,666)
======= ======= ======== ========
EARNINGS PER SHARE -- BASIC
Continuing operations............................. $ (0.09) $ (0.02) $ (0.36) $ (0.07)
Loss from discontinued operations................. -- (0.16) (0.10) (0.49)
Gain on disposal of discontinued operations....... -- -- 0.15 --
Net loss per share................................ (0.09) (0.18) (0.31) (0.56)
EARNINGS PER SHARE -- DILUTED
Continuing operations............................. (0.09) (0.02) (0.36) (0.07)
Loss from discontinued operations................. -- (0.16) (0.10) (0.49)
Gain on disposal of discontinued operations....... -- -- 0.15 --
Net loss per share................................ (0.09) (0.18) (0.31) (0.56)
Shares used in basic per share calculation........ 36,668 27,680 36,123 27,945
Shares used in diluted per share
calculation -- continuing operations............ 36,668 27,680 36,123 27,945
Shares used in diluted per share
calculation -- loss from discontinued
operations...................................... 36,668 27,680 36,123 27,945
Shares used in diluted per share
calculation -- gain on disposal of discontinued
operations...................................... -- -- 37,060 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
INGENUUS CORPORATION.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
2000 1999(1)
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,592 $ 23,884
Accounts receivable, net.................................. 877 2,399
Income taxes receivable................................... 2,100 2,100
Other receivable.......................................... 4,762 665
Prepaid expenses and other current assets................. 245 92
-------- --------
Total current assets.............................. 17,576 29,140
Property and equipment -- net............................... 1,062 6,451
Goodwill and other intangibles.............................. 16,280 6,914
Loan to related party....................................... -- 430
Investments and other assets................................ 14,550 2,824
-------- --------
TOTAL............................................. $ 49,468 $ 45,759
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,371 $ 2,676
Accrued and other current liabilities..................... 3,204 2,960
Customer and other advances............................... 465 3,636
Bank loan................................................. -- 222
-------- --------
Total current liabilities......................... 5,040 9,494
Other liabilities -- long term.............................. 292 324
-------- --------
Total liabilities................................. 5,332 9,818
-------- --------
Stockholders' equity:
Common stock.............................................. 102,394 91,551
Notes receivable.......................................... (27) (156)
Comprehensive income...................................... 9,037 --
Treasury stock............................................ (2,452) (1,987)
Accumulated deficit....................................... (64,816) (53,467)
-------- --------
Total stockholders' equity........................ 44,136 35,941
-------- --------
TOTAL............................................. $ 49,468 $ 45,759
======== ========
</TABLE>
---------------
(1) The balance sheet at November 30, 1999 has been derived from the
consolidated audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
INGENUUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
AUGUST 31, AUGUST 31,
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(11,349) $(15,666)
Deduct: Gain on disposal of discontinued operations....... (5,363) --
Losses between year-end and the measurement
date.............................................. (999) --
-------- --------
Net loss from continuing operations....................... (17,711) (15,666)
-------- --------
Adjustments from operating activities:
Depreciation and amortization.......................... 6,162 5,409
Loss on disposal of fixed assets....................... (86) --
Equity losses from joint venture....................... -- 585
Stock compensation expenses............................ -- 96
Changes in assets and liabilities
Accounts receivable.................................. 1,522 3,841
Prepaid expenses and other current assets............ (132) 1,174
Accounts payable..................................... (1,305) (586)
Accrued and other liabilities........................ (1,122) (765)
Customer advances.................................... 1,118 (860)
-------- --------
Net cash used for operating activities of
continuing operations........................... (11,554) (6,772)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Inbox -- net of cash acquired.............. (7,603) --
Overdraft disposed of , net of cash acquired -- Chip &
Chip................................................... 24
Purchases of property and equipment....................... (2,765) (2,054)
Sale of property and equipment............................ 296 --
Investment in joint venture corporation................... -- (2,329)
-------- --------
Net cash used for investing activities of
continuing operations........................... (10,048) (4,383)
-------- --------
CASH FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 399 75
Repurchase of common stock................................ -- (927)
Collection of notes receivable............................ (44) 9
-------- --------
Net cash provided by (used for) financing
activities of continuing operations............. 355 (843)
-------- --------
Operating cashflow from discontinued operations............. 6,955 --
Net decrease in cash and equivalents........................ (21,247) (11,998)
Cash and cash equivalents, beginning of period.............. 23,884 42,480
-------- --------
Cash and cash equivalents, end of period.................... $ 9,592 $ 30,482
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
INGENUUS CORPORATION.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles in the United States ("GAAP") for interim financial information and
in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
months and nine months ended August 31, 2000 are not necessarily indicative of
the results that may be expected for the fiscal year ending November 30, 2000 or
for any other period. The unaudited condensed consolidated interim financial
statements contained herein should be read in conjunction with the audited
financial statements and footnotes for the year ended November 30, 1999 included
in the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 2, 2000.
In accordance with Securities & Exchange Commission amendment for fiscal
quarters ending on or after March 15, 2000, the interim financial statements
included within the quarterly report, were reviewed by their independent
accountants, PricewaterhouseCoopers.
PricewaterhouseCoopers was unable to complete their review of the interim
financial statements pending receipt of an independent valuation of Chip & Chip.
2. DISCONTINUED OPERATIONS
On April 6, 2000, the Company sold its semiconductor intellectual property,
library development and design tools and service business ("SIP Business") to
DII, Semiconductor Inc. ("DII") for $11.3 million ($5.5 million in cash and
$972,000 due every quarter for next nine quarters beginning July 30, 2000). As a
result, the operations of the SIP Business have been classified as discontinued
operations in the accompanying Condensed Consolidated Financial Statements and
related Notes.
Revenues for the SIP Business were $1.6 million and $4.5 million in the
second quarter and first half of 1999, respectively, and were $1.3 million in
first quarter of fiscal 2000 and $729,000 through the date of disposal.
3. EARNINGS PER SHARE (EPS) DISCLOSURES
Basic EPS excludes dilution and is computed by dividing net loss
attributable to common stockholders by the weighted average of common shares
outstanding (excluding shares subject to repurchase rights) 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. Diluted net loss per share does not include the weighted average effect
of dilutive potential common shares including options to purchase common stock
and common stock subject to repurchase in any period presented where the effect
would be antidilutive.
4
<PAGE> 7
INGENUUS CORPORATION.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Loss from continuing operations................... $(3,274) $ (435) $(13,089) $ (1,969)
Loss from discontinued operations................. -- (4,636) (3,623) (13,697)
(Loss)/gain on disposal of discontinued
operations...................................... (70) -- 5,363 --
------- ------- -------- --------
Loss attributed to discontinued operations........ (70) (4,636) 1,740 (13,697)
------- ------- -------- --------
Net loss.......................................... $(3,344) $(5,071) $(11,349) $(15,666)
======= ======= ======== ========
Denominator -- Basic EPS common stock
outstanding..................................... 36,668 27,680 36,123 27,945
------- ------- -------- --------
EARNINGS PER SHARE -- BASIC
Loss from continuing operations................... $ (0.09) $ (0.02) $ (0.36) $ (0.07)
Loss from discontinued operations................. -- (0.16) (0.10) (0.49)
Gain on disposal of discontinued operations....... -- -- 0.15 --
Net loss per share................................ (0.09) (0.18) (0.31) (0.56)
DENOMINATOR -- DILUTED EPS
Denominator -- Basic EPS.......................... 36,668 27,680 36,123 27,945
Effect of dilutive securities
Weighted average common share equivalents
related to purchase rights and options....... -- -- 937 --
------- ------- -------- --------
36,668 27,680 37,060 27,945
======= ======= ======== ========
EARNINGS PER SHARE -- DILUTED
Loss from continuing operations................... $ (0.09) $ (0.02) $ (0.36) $ (0.07)
Loss from discontinued operations................. -- (0.16) (0.10) (0.49)
Gain on disposal of discontinued operations....... -- -- 0.15 --
Net loss per share................................ (0.09) (0.18) (0.31) (0.56)
</TABLE>
4. NEW ACCOUNTING STANDARDS
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. SOP 98-1 has not had a material impact
on the results of operations.
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. SOP 98-5 has not had a material impact on the results
of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities (SFAS No. 133)."
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 does not
currently have any derivative or hedging activities.
5
<PAGE> 8
INGENUUS CORPORATION.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In December 1999, SAB 101 was issued which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, SAB 101B was issued and this delays the
implementation date of SAB 101 until no later than the fourth quarter of fiscal
years beginning after December 15, 1999. Ingenuus will therefore be required to
implement SAB 101 from December 1, 2000. The Company is awaiting results of
additional general requests regarding revenue recognition practices before
evaluating the impact of SAB 101.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive Income (Loss) is comprised of net loss and other
comprehensive earnings such as unrealized holding gains or losses on available
for-sale marketable securities.
Ingenuus' total comprehensive income (loss) was as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
---------------- ------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net loss...................................... (3,344) (5,071) (11,349) (15,666)
Other comprehensive income:
Unrealized holding gain on
available-for-sale marketable
securities............................... 9,037 -- 9,037 --
------ ------ ------- -------
Comprehensive income/(loss)................. 5,693 (5,071) (2,312) (15,666)
====== ====== ======= =======
</TABLE>
6. 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 Slim Tech was $1,630,000 at August 31,
2000.
Since the third quarter of 1998, the Company has held an investment of
$840,000 in series B preferred stock of Virage Logic, Inc., (Virage). Following
the initial public offering of Virage on August 1, 2000, Ingenuus now holds
525,000 shares of common stock in Virage. Virage's common stock closed at
$18.8125 per share on August 31, 2000. This unrealized gain of $9 million is
accounted for as other comprehensive income.
7. SALE OF BUSINESSES
On June 13, 2000, the Company entered into an Asset Purchase Agreement with
the Management of Chip & Chip, part of the EDA segment of the company. Chip &
Chip Management purchased the assets and certain liabilities of Chip & Chip for
$2,580,000, (payable in three installments over the next two years). The
proceeds are secured on 1 million Ingenuus shares and 700,000 fully vested
options to purchase Ingenuus stock, held by Chip & Chip management, and 1
million shares of Chip & Chip. (The gain on the sale of $292,000 has been
deferred and will be recognized as the payments are received.)
The Company was recently required to provide an independent valuation of
Chip & Chip to complete the review of third quarter financial statements by its
independent accountants, PricewaterhouseCoopers.
The Company is in the process of having an independent valuation of Chip &
Chip performed and expects the valuation to be completed in November 2000.
8. SEGMENT AND GEOGRAPHIC INFORMATION
As of August 31, 2000, the Company operated in two segments, Ingenuus
Corporation, and EDA. For the three months ended August 31, 2000, Verilux and
Chip & Chip, (prior to June 14, 2000) are included together in EDA in the tables
below (in thousands), and Novo and Inbox are included in Ingenuus.
The activities of Verilux and Chip & Chip before and during the first
months of 2000 involved mostly R&D expenditures and general administrative
expenses.
6
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INGENUUS CORPORATION.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Ingenuus segment's activities for the three months and nine months
ended August 31, 2000, excluding the write-off of in process research and
development charge and amortization of goodwill, involved mainly activities
surrounding product sales, system maintenance revenue, research and development
expenditures and general administrative expenses. Since both the Ingenuus and
EDA segments of the business were purchased in the fourth quarter of fiscal 1999
and the first quarter of fiscal 2000, and since the SIP Business was sold on
April 6, 2000, comparative information presentation was not relevant.
<TABLE>
<CAPTION>
EDA INGENUUS COMPANY
------- -------- --------
<S> <C> <C> <C>
THREE MONTHS ENDED AUGUST 31, 2000
Revenue............................................. $ 260 $ 951 $ 1,211
Loss from operations................................ (112) (3,404) (3,516)
Amortization........................................ 130 1,093 1,223
Assets.............................................. 1,051 48,417 49,468
Capital expenditures on long-lived assets........... -- 156 156
NINE MONTHS ENDED AUGUST 31, 2000
Revenue............................................. $ 535 $ 2,262 $ 2,797
Loss from operations................................ (1,244) (12,423) (13,667)
Amortization........................................ 504 3,196 3,700
Assets.............................................. 1,051 48,417 49,468
Capital expenditures on long-lived assets........... 319 299 618
</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 months ended
August 31, 2000 and May 31, 2000 as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------
AUGUST 31, MAY 31,
2000 2000
---------- -------
<S> <C> <C>
United States............................................ $ 638 $ 733
Asia..................................................... 562 507
Other International...................................... 11 36
------ ------
Total.......................................... $1,211 $1,276
====== ======
</TABLE>
Major Customers and International Sales -- For the quarter ended August 31,
2000, six customers accounted for approximately 70% of revenue whereas for the
quarter ended May 31, 2000, five customers accounted for approximately 69% of
revenue. Since both the Ingenuus and EDA segments of the business were purchased
in the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000, and
since the SIP business was sold on April 6, 2000, comparative information
presentation was not relevant.
9. CONTINGENCIES
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
7
<PAGE> 10
INGENUUS CORPORATION.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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; 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. 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 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 arguments 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. Thereafter, on March 13, 2000, the Aspec
Defendants answered the plaintiffs' unverified complaint, generally denying all
allegations and asserting affirmative defenses.
On March 16, 2000, the court certified a plaintiff class. On that same
date, the Court found, sua sponte, that the case is complex, and pursuant to a
pilot program implemented in the Superior Court for Santa Clara County, assigned
it to a single judge for all purposes.
The plaintiffs have re-noticed their motion for class certification, which
is presently scheduled to be heard on November 14, 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
8
<PAGE> 11
INGENUUS CORPORATION.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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.
The parties later stipulated that the plaintiffs would have additional time
in which to file an amended complaint, as well as to re-notice a motion to
compel the production of electronically-stored documents and records from Aspec,
as well as to notice the deposition of a witness from Aspec to testify
concerning the storage of such documents and records. The plaintiffs presently
have until October 31, 2000 to file an amended complaint and re-notice the
above-referenced motion and deposition.
Other Lawsuits
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. Plaintiff filed her arbitration claim with the American
Arbitration Association in March, 2000. An arbitrator has been appointed, and
arbitration is scheduled for September 8, 2000. The arbitration date was
suspended by the American Arbitration Association, and, as of this time, has not
been rescheduled.
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. The Company has provided
information to the SEC in response to the Staff's requests.
The Company is currently unable to estimate the range of potential loss
associated with these legal proceedings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF CONTINUING AND DISCONTINUED OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Continuing and Discontinued 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
Ingenuus was founded in December 1991 as Aspec Technology to develop,
market and support semiconductor intellectual property ("SIP") to enable
customers to develop complex Integrated Circuits (ICs). More recently, our
business has been composed of three segments; our traditional SIP business; our
EDA business which is comprised of Verilux Corporation and Chip & Chip; and
Ingenuus Corporation which is focused on establishing a significant market
position as a supplier of innovative, collaborative software applications
designed to dramatically increase productivity and achieve a high rate of return
on investment by leveraging the human expertise already present in an
organization's business processes. As a result of fundamental changes in the
marketplace, we have taken the following actions:
(1) We sold our SIP Business effective April 6, 2000.
(2) We sold our Chip & Chip business effective June 14, 2000.
(3) We initiated a strategy to focus on technological innovation,
market growth and create strategic relationships in order to grow the
business-to-business opportunity.
DISCONTINUED OPERATIONS
Through fiscal 1992, the Company was principally engaged in the development
of its first products and the establishment of customer relationships. We
recognized 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, the Company had enhanced its 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 us to
expand our customer base to include other integrated semiconductor companies,
fab-less semiconductor companies, electronics systems manufacturers and
distributors that sell to such entities. During 2000, we are undergoing a
fundamental and rapid shift in our business with the major focus on
Internet-enabled, business-to-business collaboration applications that automate
product and document change packages. We have moved 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.
On April 6, 2000, the Company sold its semiconductor intellectual property,
library development and design tools and service business ("SIP Business") to
DII, Semiconductor Inc. ("DII") for $11.3 million ($5.5 million in cash and
$972,000 due every quarter for next six quarters beginning July 30, 2000). The
first payment was received July 2000.
INGENUUS CORPORATION
Our strategy is to provide Internet-enabled, business-to-business,
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
product and
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document changes throughout the entire supply chain. To implement this strategy
in December 1999, we acquired Inbox Software ("Inbox") whose products provide
automated solutions for mission-critical, business-to-business, e-commerce
product and document change management processes.
The Internet has become a medium through which businesses can communicate,
streamline business processes and transact business more efficiently. Escalating
dynamics like time-to-market pressures, high customization demands, and
increased dependence on outsourcing have elevated business-to-business
collaboration to core competency status. We believe companies must not only find
more efficient ways to share information internally, they must also find ways to
collaborate with their business partners, suppliers and customers.
Most companies use basic collaboration tools such as email, scheduling,
corporate intranets and internal document management. But these tools do not
solve the complex collaboration challenges of the digital economy. Most
companies have developed ad hoc collaboration processes to manage data and
coordinate basic functions. Most of these solutions do not leverage the ubiquity
of the Internet nor provide seamless, real-time integration with external
business partners. New applications that are tailored to specific tasks are
needed that can leverage existing electronic information, regardless of where it
resides. These new task-based applications must be fast and easy to deploy; as
well as cost-effective to maintain.
COLLABORATIVE PRODUCT COMMERCE
The Internet provides inexpensive connectivity, an open and scalable
architecture, and common software and communication standards to support
interoperability between the islands of information residing throughout the
virtual supply chain.
A new breed of Internet solutions is emerging -- Collaborative Commerce
(c-commerce) -- that combines the strengths of supply chain automation with the
transactional capabilities of online marketplaces. Different from E-commerce,
which is a transaction exchange, c-commerce is an intellectual capital exchange
that can make the much-anticipated virtual enterprise a reality.
Collaborative product commerce (CPC) defines a new business strategy that
leverages the ubiquity of the Internet, allowing various members of the supply
chain to collaboratively design, build, market and deploy products and services.
CPC enhances supply chain visibility, accelerates business velocity, creates
barriers to entry and enables new business models. CPC represents the next major
phase in the business evolution of the Internet. CPC is still being defined, and
no vendor has demonstrated a complete, end-to-end CPC solution, and probably
never will. Instead vendors will provide at least three (3) classes of CPC
solutions: 1) CPC application; 2) CPC tools; 3) CPC platforms.
Customers for CPC products include vertically integrated self-sufficient
manufacturers as well as horizontally integrated teams of partners and
suppliers. Virtual manufacturers who build products through an extended contract
manufacturing and supply chain are particularly suited for CPC products. They
exhibit a need for application tools, and platforms to make CPC a reality.
Ingenuus is developing CPC applicators tailored to specific tasks that involve
participants inside the corporation and throughout the supply chain. Ingenuus
Applications for Virtual Manufacturing provides business process based
applications with integrated workflow focused on defining, reviewing,
distributing, and implementing product changes. These applications improve the
ability of Internet-connected manufacturing supply chains to communicate and
collaborate on new product designs and product changes. For example, using the
Ingenuus Products Change Manager (PCM) application 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 entire virtual
manufacturing organization. This may be one or more separate companies located
anywhere in the world along with other companies in the supply chain. These
applications 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.
The global Internet revolution is forcing companies to move from data
sharing to externalized process integration. This represents an important shift
from simply publishing information using the Internet (serial)
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to utilizing the Internet to enable and enhance collaboration (circular). As a
result, there is renewed focus on processes, particularly between companies and
their customers, partners, and suppliers. This is especially true in the
manufacturing arena where, in the past, automation has focused on product
design, not process management, collaboration, and distribution. The
manufacturing industry is dependent on various processes for regional and global
manufacturing quality control. For these businesses, process management must be
an enabler, not a barrier to rapid adaptability and operational excellence.
With a CPC application that is process enabled, the chief designer for a
virtual manufacturer can generate a master plan of a new design or design change
and, in short order, begin simultaneous review by team members, partners, and
factories anywhere in the world. Once the design or proposed change is approved,
manufacturing can be begin simultaneously around the globe. The processes that
represent the acquisition of various raw materials and components, distributing
them to the factories, bringing them to inventory, programming the automated
assembly equipment, and adjusting individual production schedules can be
integrated using CPC tools and platforms. This data is then used by the CPC
Applications. The entire content supply chain is involved, including traditional
product design, supply chain management and customer service. Because process
enabled CPC applications virtually eliminate the human errors associated with
current methods, while leveraging human expertise on how to get things done, our
main attractions to a virtual manufacturing company are rapid time to revenue,
extraordinary product quality, and sharply reduced cost of customer service.
The market for CPC involves various industries. It is especially attractive
to manufacturing companies since it is reported that only about 11% have
automated the change process.
Ingenuus designs, builds and markets business-to-business collaboration
applications. The Ingenuus applications provide adaptable, process-based
collaboration between trusted customers, suppliers and other business partners.
Ingenuus applications combine people, processes, information and technology to
make normally complex and difficult collaboration simple. The result is a
dramatic improvement in profitability and efficiency throughout the entire
virtual supply chain.
Ingenuus is currently targeting virtual manufacturers with its Ingenuus
Applications for Virtual Manufacturing. Ingenuus customers are global, virtual
manufacturers in the high technology, communications, semi-conductor, machinery,
mechanical, medical equipment, process, and FDA regulated industries.
Specifically, Ingenuus applications:
1. Manage changes, not just documents. Unlike other applications that
manage documents, or changes made to documents, the Ingenuus applications
manage the change itself. Each change is an object in its own right, and
documents affected by the change can be included in the change packet.
Reference information, ancillary documents, and even web pages can be
attached to the change packet and routed along with the documents affected
ensuring that reviewers and approvers alike have the information they need
to make an informed decision about the proposed change. When a change
packet is routed to various participant instructions, notes and comments
can accompany it. This helps to eliminate human error and
misinterpretations. Ingenuus applications have "redlining" capability and
the ability for annotating files with the electronic equivalent of
"post-it" notes. For example, although only one user can be working on the
controlled master design or document, colleagues working on the same change
packet can be instantly notified that an updated "master" design or
document is available, and reference copies of it will be inserted
automatically in each collaborator's task-list. 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 what happens to the data when someone works on it. A product
may go through hundreds of design changes during its life-cycle, each
involving far-reaching modifications to the underlying engineering content.
The Ingenuus applications acts as the corporate change repository 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 each participants every move. Data can be
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imported from other systems, and later, when the change is approved, the
updated data can be exported to those systems.
3. Manage the flow of data between people. Ingenuus applications 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.
Bringing order to this highly complex workflow is what Ingenuus
applications do best. In particular, the software keeps track of the
thousands of individual decisions that determine who does what next.
Because the Ingenuus applications are process enabled, they do not simply
provide the ability to move change packets from one step in the process to
another, they actually "push" the change packet through the process
utilizing escalation rules. 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.
4. Track all the events and movements that happen during the history
of a change. Ingenuus applications record the states and milestones a
change goes through. The software provides a valuable source of process
audit trail 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.
Consulting Services
We provide a variety of services that help integrate the Ingenuus 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 CPC products earn market share and companies want our
applications integrated with other CPC tools and platforms.
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.
The Ingenuus business unit currently provides worldwide maintenance and
support for Zycad accelerators and these customers should continue to be
supported in the future. Updates to current customers using existing Zycad
accelerators and software should continue to be available via local support and
the Internet.
Engineering efforts devoted to developing products 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, we have developed 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.
RESULTS OF CONTINUING OPERATION
On April 28, 2000 the Company formally changed its name from Aspec
Technology Inc. to Ingenuus Corporation.
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OPERATING SEGMENTS
As of August 31, 2000, the Company operated in two segments, Ingenuus
Corporation, and EDA. For the quarter ended August 31, 2000, Verilux and Chip &
Chip (prior to the sale on June 14, 2000) are included together in EDA in the
tables below, and Novo and Inbox are included with Ingenuus.
The Company's EDA business unit was formed with the acquisition and merger
of Chip & Chip and Verilux Design Corporation in September 1999. These two 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 Chip ("SOC").
The Company's Ingenuus business unit was formed with the acquisition and
merger of Novo in October 1999 and Inbox Software, Inc, in December 1999.
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 whereas Novo
provides system maintenance services. Ingenuus segment's activities for the
three and nine month periods ended August 31, 2000, excluding amortization of
goodwill, involved mainly activities surrounding product revenues from Inbox
business, system maintenance revenue from the Novo business, R&D expenditures,
sales and marketing and general administrative expenses.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth for the periods indicated selected
statements of operations data expressed both in $000's and as a percentage of
revenue:
Since both the Ingenuus and EDA segments of the business were purchased in
the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000, and the
SIP business was sold on April 6, 2000, there was no relevant comparative
information available for the three months and nine months ended August 31,
2000. Therefore, management discussions presented below compare the second
quarter of fiscal 2000 to the third quarter of fiscal 2000 which related to our
continuing business.
INGENUUS CORPORATION
SEGMENTED STATEMENT OF OPERATIONS
QUARTER ENDED AUGUST 31, 2000
<TABLE>
<CAPTION>
EDA INGENUUS COMPANY
----- -------- -------
($000'S)
(UNAUDITED)
<S> <C> <C> <C>
Revenue................................................. $ 260 $ 951 $ 1,211
Cost of revenue......................................... 65 573 638
----- ------- -------
Gross profit............................................ 195 378 573
----- ------- -------
Operating expenses:
Research and development.............................. 177 794 971
Sales and marketing................................... -- 853 853
General and administrative............................ -- 1,042 1,042
Amortization -- goodwill.............................. 130 1,093 1,223
----- ------- -------
Total operating expenses...................... 307 3,782 4,089
Loss from operations.................................... (112) (3,404) (3,516)
Interest and other income, net.......................... -- 242 242
----- ------- -------
Loss from continuing operations......................... (112) (3,162) (3,274)
Loss on disposal of discontinued operations............. -- (70) (70)
----- ------- -------
Net loss................................................ $(112) $(3,232) $(3,344)
===== ======= =======
</TABLE>
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INGENUUS CORPORATION
SEGMENTED STATEMENT OF OPERATIONS
QUARTER ENDED MAY 31, 2000
<TABLE>
<CAPTION>
EDA INGENUUS COMPANY
----- -------- -------
($000'S)
(UNAUDITED)
<S> <C> <C> <C>
Revenue................................................. $ 275 $ 1,001 $ 1,276
Cost of revenue......................................... 67 1,026 1,093
----- ------- -------
Gross profit (loss)..................................... 208 (25) 183
----- ------- -------
Operating expenses:
Research and development.............................. 467 304 771
Sales and marketing................................... -- 802 802
General and administrative............................ -- 1,810 1,810
Amortization -- goodwill.............................. 179 1,058 1,237
----- ------- -------
Total operating expenses...................... 646 3,974 4,620
Loss from operations.................................... (438) (3,999) (4,437)
Interest and other income, net.......................... -- 177 177
----- ------- -------
Loss from continuing operations......................... (438) (3,822) (4,260)
Loss from discontinued operations....................... -- (1,209) (1,209)
Gain on disposal of discontinued operations............. -- 5,433 5,433
----- ------- -------
Net income/(loss)....................................... $(438) $ 402 $ (36)
===== ======= =======
</TABLE>
Revenue. Revenue for Ingenuus remained relatively flat, $1.0 million in the
quarter ended May 31, 2000, compared to $951,000 in the quarter ended August 31,
2000.
Revenue from the EDA segment for the quarter ended August 31, 2000 was
$260,000 derived from the sale of Verilux products.
Cost of revenue. Cost of revenue for Ingenuus primarily represents the
costs of products, personnel and other operating expenses incurred in the
implementation phase of the Inbox product. Cost of revenue as a percentage of
revenue decreased by 43% from 103% of revenue in the second quarter ended May
31, 2000 to 60% of revenue in the third quarter ended August 31, 2000. The
decrease was due to the fact that the products sold by Inbox prior to being
acquired by Ingenuus Corporation, were sold at large discounts. Inbox was also
obligated to provide certain professional services associated with these sales
at very low margins. Ingenuus had delivered these products, and satisfied the
majority of outstanding professional services and obligations in the second
quarter of fiscal 2000. We started selling more product at our targeted prices
in the third quarter of fiscal 2000 and our gross margins increased accordingly.
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. Research and development
expenses for Ingenuus increased by 161% from $304,000 in the three months ended
May 31, 2000 to $794,000 in the three months ended August 31, 2000. Research and
development expenses as a percentage of revenue was 30% in the three months
ended May 31, 2000 compared to 84% in the three months ended August 31, 2000.
This increase in research and development expenses in the three months ended
August 31, 2000 was primarily due to the fact that more effort was placed on the
continued development of Ingenuus products.
Research and development expenses for the EDA segment decreased by 62% from
$467,000 in the three months ended May 31, 2000 to $177,000 in the three months
ended August 31, 2000. The decrease in research and development expenses in the
third quarter of fiscal 2000, compared with the second quarter of fiscal 2000,
was primarily due to the sale of Chip & Chip.
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.
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Sales and marketing expenses for Ingenuus increased by 6% from $802,000 in the
three months ended May 31, 2000, to $853,000 in the three months ended August
31, 2000. Sales and marketing expense as a percentage of revenue was 80% in the
three months ended May 31, 2000 and 90% in the three months ended August 31,
2000. The absolute dollar increase in sales and marketing expenses in the three
months ended August 31, 2000, compared with the three months ended May 31, 2000,
was due to an increase in marketing expenses relating to promotion of our
Ingenuus products.
General and administrative. General and administrative expenses consist of
salaries and expenses related to Executives, Corporate Finance, Legal and Human
Resources departments. General and administrative expenses, decreased by 42%
from $1.8 million in the three months ended May 31, 2000, to $1.0 million in the
three months ended August 31, 2000. General and Administrative expenses as a
percentage of revenue was 181% in the three months ended May 31, 2000 and 110%
in the three months ended August 31, 2000. The absolute dollar decrease in
general and administrative expenses in the three months ended August 31, 2000,
compared with the three months ended May 31, 2000, was due to decreased
professional fees, as well as a release in the allowance for doubtful accounts
as one of the previously provided balances was collected.
The Company also recorded $1.2 million in amortization expenses in the
second and third quarters of fiscal 2000, due to acquisitions in the last two
years.
Interest, and other income net. Net interest and other income for Ingenuus
increased 37% from $177,000 in the three months ended May 31, to $242,000 in the
three months ended August 31, 2000.
Foreign Currency. Balance sheet accounts of Ingenuus' 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from license, product and
system maintenance revenues and the net proceeds of $71.9 million from its
initial public offering of Common Stock in August 1998.
Our operating activities utilized net cash of $11.6 million and $6.8
million in the nine-month period ended August 31, 2000 and August 31, 1999
respectively. Net cash used for operating activities in the first nine months of
fiscal 2000 was mainly due to continuing and discontinued operational
activities.
Net cash used in investing activities was $10 million in the nine-month
period ended August 31, 2000 compared to $4.4 million in the nine-month period
ended August 31, 1999. Investing activities for the first nine months of fiscal
2000 consisted primarily of the investment in the Inbox Software Corporation of
$7.6 million and net purchases of property and equipment of $2.4 million.
Net cash provided by financing activities was $355,000 in the nine-month
period ended August 31, 2000 mainly due to cash receipts from stock option
exercises. In the nine month period ended August 31, 1999 the company utilized
net cash of $843,000 mainly due to amounts paid to repurchase common stock.
Net cash provided by the discontinued operations in the first nine months
of fiscal 2000 was $7.0 million.
At August 31, 2000, the Company had cash and equivalents of $9.6 million.
As of August 31, 2000, we had an accumulated deficit of $64.8 million and
working capital of $12.7 million.
The Company has suffered recurring losses for the years ended November 30,
1998 and 1999. Ingenuus'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,
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- 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.
We intend to continue to invest in the development of new products and
enhancements to our existing products. The Company's 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 the Company and
related parties, the costs and timing of our product development efforts and the
success of these development efforts, the costs and timing of the 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, and other factors. We
believe that our current cash and investment balances together with any cash
generated from operations will be sufficient to meet the Company's operating and
capital requirements for the next 12 months.
Other Factors Affecting Future Operating Results
Fluctuations in Future Operating Results; Dependence Upon Timely Project
Completion. The Company's 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 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 those products; the cancellation or delay of
orders from major customers; the level of changes to customer requirements due
to process specific changes requested by customers, the Company's ability to
retain its existing personnel; and general economic conditions. These and other
factors could have a material adverse effect on our business, operating results
and financial condition.
Management of Growth; Retention of Key Personnel. The growth of the
Company's business and expansion of its customer base has placed, and is
expected to continue to place, a significant strain on the Company's management
and operations. The Company's future success will depend on its ability to
identify, attract, hire and retain skilled employees and to hire replacements
for employees that leave the Company.
In connection with 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.
From time to time, we expect to evaluate other potential acquisitions to
build our expertise. There can be no assurance that we will be able to identify
attractive acquisition candidates, will be able to successfully complete any
such acquisition or will be able to integrate any acquired company with other
operations. In connection with existing or potential business acquisitions, the
failure to successfully and efficiently integrate
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new employees and operations of the acquired company with the Company's existing
employees and operations or to successfully manage an acquired company located
in a different geographical location could materially adversely effect the
Company's business, operating results and financial condition.
Risks Associated with Professional Services Business. One of the Company's
strategies is to increase its revenue from collaborative engineering services.
The engineering services business is subject to a number of risks, including
potential competition from numerous other engineering service companies and the
ability to attract and retain qualified engineering personnel. There can be no
assurance that the Company can successfully expand its collaborative engineering
services, and the failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence Upon Continuous Product Development; Risk of Product
Delays. Many of our customers operate in the high-tech manufacturing
environment, which is 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 its ability to continue to enhance its existing products
and to develop and introduce new products that satisfy increasingly
sophisticated customer requirements. If we fail to anticipate or respond
adequately to changes in e-business technology or customer requirements, or any
significant delays in product development or introduction, we would see a
material adverse effect on our business, operating results, and financial
condition. There can be no assurance that the Company will be successful in its
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 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 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 business, operating results and financial condition.
Internet Related Risks on Our Business Potential
Should Electronic Commerce Using the Internet Not Continue to Develop, We
Could Experience Loss of Sales. Our success is dependent upon continued growth
of the Internet as the electronic venue of commerce in the future. Acceptance of
the Internet has increased in recent times with millions of users making the
connection. This growth is a recent phenomenon and may not continue.
Furthermore, Internet commerce, especially as an integral part of supply chain
management is still in its infancy.
Many companies may take a "wait and see" attitude before adopting
business-to-business software and the Internet as their primary means of
exchanging product content information. Current concerns include infrastructure
support, secure data transmission in this public environment, governmental
regulations, and the general viability of the Internet as a commercial
marketplace. Internet use increases daily, putting an ever-changing demand on
the support base needed for smooth operation. Reliable equipment and preventive
maintenance will be essential to the growth and acceptance of this important
medium. Business to business activity over the Internet will include
transmission of sensitive confidential information. Protection of that data will
be vital to the Internet's acceptance for business transactions.
e-business, by definition, is global. Business methods that are effective
and acceptable in our market place may not work in markets that operate in
different legal and governmental climates throughout the world. Therefore, we
could see a negative impact on our sales.
Risks Associated With International Operations
Any 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
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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 in United
States dollars, currency exchange fluctuations could have a material adverse
effect on the Company's business to the extent that the Company's pricing is not
competitive with products priced in local currencies. We do not currently hedge
against foreign currency fluctuations.
Limited Protection of Proprietary Rights
The Company's success is dependent on its ability to protect its
proprietary technology. The Company relies upon a combination of copyright,
patent, trade secret and trademark laws to protect its proprietary technology.
The Company enters into confidentiality agreements with its employees,
distributors and customers and limits access to and distribution of the source
code to its software and other proprietary information. There can be no
assurance that the steps taken by the Company in this regard will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. Any such misappropriation of the Company's
technology or development of competitive technologies could have a material
adverse effect on the Company's business, operating results and financial
condition. Despite the Company's efforts to protect its proprietary rights,
there can be no assurance that the Company will be able to protect its
proprietary rights against unauthorized third-party copying or use, and attempts
may be made to copy or reverse engineer aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing the
unauthorized use of the Company's products is difficult and the Company could
incur substantial costs in protecting and enforcing its intellectual property
rights. Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's 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 the Company's business, operating
results and financial condition.
As is common in the technology industry, the Company may from time to time
receive notices from third parties claiming infringement by the Company's
products of third-party proprietary rights. While the Company is not currently
subject to any such claim, the Company believes that its products could
increasingly be subject to such claims as the market for its products grows and
as more competitors enter the market. Any such claim, with or without merit,
could result in significant litigation costs and require the Company to enter
into royalty and licensing agreements, which could have a material adverse
effect on the Company's business, operating results and financial condition.
Such royalty and licensing agreements, if required, may not be available on
terms acceptable by the Company or at all.
Potential for Product Defects
Complex products such as those offered by the Company may contain
undetected errors, defects or "bugs." There can be no assurance that, despite
significant testing by the Company and by current and potential customers,
errors will not be found in products or enhancements to existing products after
commencement of commercial shipments. The Company does not presently maintain
insurance with respect to potential damages due to errors or defects in its
products. Although the Company has 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 the Company's business, operating results
and financial condition.
YEAR 2000 COMPLIANCE
To date, the Company has not experienced any significant business
disruptions as a result of the Year 2000 issue. In addition, the Company has not
been informed of any such problems experienced by its 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 the Company's customers, suppliers and other
critical service providers. The Company will continue to monitor all
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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.
Project costs to date of the Year 2000 issue totaled $146,000. The Company
does not expect to incur significant costs during fiscal 2000 related to ongoing
monitoring and support activities for the Year 2000 issue.
Volatility of Share Price
Since the Company's initial public offering in April 1998, the market price
of the Company's Common Stock has been highly volatile and is expected to be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, the Company's 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 the Company or its existing or potential competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends affecting the Internet, 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
the Company and certain of its 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 the Company's
business, operating results and financial condition. See "Part II".
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PART II. OTHER INFORMATION
ITEM 1. 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; 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.
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 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. 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. Thereafter, on March 13, 2000, the Aspec
Defendants answered the plaintiffs' unverified complaint, generally denying all
allegations and asserting affirmative defenses.
On March 16, 2000, the court certified a plaintiff class. On that same
date, the Court found, sua sponte, that the case is complex, and pursuant to a
pilot program implemented in the Superior Court for Santa Clara County, assigned
it to a single judge for all purposes.
The plaintiffs have re-noticed their motion for class certification, which
is presently scheduled to be heard on November 14, 2000.
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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 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.
The parties later stipulated that the plaintiffs would have additional time
in which to file an amended complaint, as well as to re-notice a motion to
compel the production of electronically-stored documents and records from Aspec,
as well as to notice the deposition of a witness from Aspec to testify
concerning the storage of such documents and records. The plaintiffs presently
have until October 31, 2000 to file an amended complaint and re-notice the
above-referenced motion and deposition.
Other Lawsuits
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. Plaintiff filed her arbitration claim with the American
Arbitration Association in March, 2000. An arbitrator has been appointed, and
arbitration is scheduled for September 8, 2000. The arbitration date was
suspended by the American Arbitration Association, and, as of this time, has not
been rescheduled.
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. The Company has provided
information to the SEC in response to the Staff's requests.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INGENUUS CORPORATION.
By: /s/ RAYMOND GRAMMER
------------------------------------
Raymond Grammer
Chief Financial Officer
Date: October 13, 2000
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
25
