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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 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
ASPEC TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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
February 29, 2000 was 34,368,130.
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ASPEC TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2000
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
a) Condensed Consolidated Statements of Operations for the
quarter ended February 29, 2000 and February 28, 1999....... 3
b) Condensed Consolidated Balance Sheets at February 29,
2000 and November 30, 1999............................... 4
c) Condensed Consolidated Statements of Cash Flows for the
quarter ended February 29, 2000 and February 28, 1999....... 5
d) Notes to Condensed Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 29
SIGNATURES........................................................... 30
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ASPEC TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ ------------
<S> <C> <C>
Revenue..................................................... $ 1,566 $ 2,896
Cost of revenue............................................. 2,711 4,218
------- -------
Gross profit................................................ (1,145) (1,322)
------- -------
Operating expenses:
Research and development.................................. 1,575 1,152
Sales and marketing....................................... 547 1,113
General and administrative................................ 2,485 1,455
Write-off of purchased technology......................... 925 --
Amortization -- goodwill.................................. 1,450 167
------- -------
Total operating expenses.......................... 6,982 3,887
------- -------
Loss from operations........................................ (8,127) (5,209)
Interest and other income, net.............................. 159 548
Net Loss.................................................... (7,968) (4,661)
Provision for income taxes.................................. -- --
------- -------
Net income (loss)........................................... (7,968) (4,661)
Basic earnings (loss) per share............................. $ (0.22) $ (0.17)
======= =======
Shares used in basic per share calculation.................. 35,463 28,055
======= =======
Diluted earnings (loss) per share........................... $ (0.22) $ (0.17)
======= =======
Shares used in diluted per share calculation................ 35,463 28,055
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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ASPEC TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29, NOVEMBER 30,
2000 1999(1)
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 13,566 $ 23,884
Accounts receivable, net
Billed................................................. 760 2,367
Unbilled............................................... 152 32
Income taxes receivable................................... 2,100 2,100
Prepaid expenses and other current assets................. 770 665
Inventory -- finished goods............................... 120 92
-------- --------
Total current assets.............................. 17,468 29,140
Property and equipment -- net............................... 5,629 6,451
Goodwill and other intangibles.............................. 22,364 6,914
Loan to related party....................................... -- 430
Investments and other assets................................ 2,829 2,824
-------- --------
Total............................................. $ 48,290 $ 45,759
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 1,507 $ 2,676
Accrued liabilities and other current liabilities......... 3,870 2,960
Customer and other advances............................... 5,856 3,636
Bank Loan................................................. -- 222
-------- --------
Total current liabilities......................... 11,233 9,494
Other liabilities -- long term.............................. 322 324
-------- --------
Total liabilities................................. 11,555 9,818
Stockholders' equity:
Common stock.............................................. 100,215 91,551
Stockholders' notes receivable............................ (58) (156)
Treasury Stock............................................ (1,987) (1,987)
Retained deficit.......................................... (61,435) (53,467)
-------- --------
Total stockholders' equity........................ 36,735 35,941
-------- --------
Total............................................. $ 48,290 $ 45,759
======== ========
</TABLE>
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(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.
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ASPEC TECHNOLOGY, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
QUARTER ENDED
----------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ ------------
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Cash flows from operating activities:
Net loss.................................................... $ (7,968) $(4,661)
Adjustments from operating activities:
Write-off purchase technology............................... 925 --
Equity loss from joint venture.............................. 67 --
Depreciation and amortization............................. 2,906 1,845
Stock compensation expense................................ -- 23
Changes in assets and liabilities
Accounts receivable:
Billed............................................... 1,629 (658)
Unbilled............................................. (120) (582)
Prepaid expenses and other current assets.............. (149) (42)
Inventory.............................................. (28) 39
Accounts payable....................................... (1,450) (270)
Accrued and other liabilities.......................... (311) 1,162
Customer advances...................................... 1920 334
-------- -------
Net cash used for operating activities................. (2,579) (2,810)
-------- -------
Cash flows from investing activities:
Acquisition of Inbox -- Net of cash.................... (7,603) --
Purchases of property and equipment....................... (473) (1,223)
Investment in joint venture corporation................... -- (2,329)
-------- -------
Net cash used for investing activities................. (8,076) (3,552)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 239 --
Collection of stockholder notes receivable................ 98 3
-------- -------
Net cash provided by financing activities.............. 337 3
-------- -------
Net decrease in cash and equivalents........................ (10,318) (6,359)
Cash and equivalents, beginning of period................... 23,884 42,480
-------- -------
Cash and equivalents, end of period......................... $ 13,566 $36,121
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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ASPEC TECHNOLOGY, INC.
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 ("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 ended February 29,
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.
2. EARNINGS PER SHARE (EPS) DISCLOSURES
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 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.
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts):
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<CAPTION>
QUARTER ENDED
-----------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ -------------
(UNAUDITED)
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Net loss attributable to common stockholders................ $(7,968) $(4,661)
------- -------
Denominator-basic EPS common stock outstanding.............. 35,463 28,055
------- -------
Basic loss per share........................................ $ (0.22) $ (0.17)
Denominator-Diluted EPS:
Denominator-Basic EPS..................................... 35,463 28,055
Effect of dilutive securities:
Weighted average common shares subject to repurchase
rights................................................ -- --
Weighted average common share equivalents related to
stock purchase rights and options..................... -- --
------- -------
35,463 28,055
------- -------
Diluted loss per share...................................... $ (0.22) $ (0.17)
======= =======
</TABLE>
Stock options to purchase 5,484,786 shares of common stock, at prices
ranging from $0.18 to $8.50 per share were outstanding at February 29, 2000, but
not included in the computation of diluted earnings per share because they were
antidilutive. 238,000 common shares subject to repurchase rights were similarly
excluded.
3. COMPREHENSIVE INCOME
The Company adopted SFAS130 "Reporting Comprehensive Income", however the
effects of adoption were immaterial to all periods presented.
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ASPEC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. 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 have a material
impact on 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.
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. The Company is currently evaluating the impact SAB 101
will have on its financial position and results of operation.
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 $1,672,000 at February 29,
2000.
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 February 29, 2000 and is accounted for under the cost
method.
6. ACQUISITIONS
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 valued 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
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ASPEC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$95,000. In conjunction with the acquisition, which was accounted for as a
purchase, assets acquired and liabilities assumed were as follows (in
thousands):
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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 of December 3, 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 (IPRD) projects. There were
two projects in process at the date of acquisition, one of which was 55%
complete and one which was 25% complete.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if Inbox Software, Inc. 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.
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QUARTER ENDED
FEBRUARY 29,
----------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
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Revenues................................................. $ 1,566 $ 3,005
Net Loss................................................. $(7,968) $(4,731)
Basic and diluted net Loss per share..................... (0.22) (0.16)
</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. 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.
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ASPEC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) In 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 to Aspec 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. In accordance with phase 1 of the Asset Purchase Agreement, DII paid Aspec
$2 million in February 2000. Such amount has been classified as "Customer and
Other Advances" in the balance sheet as of February 29, 2000. This liability and
the related sold assets will be eliminated from Aspec's balance sheet if and
when the Asset Purchase Agreement is finalized.
The Asset Purchase Agreement must be ratified by the Aspec Board of
Directors to be effective. As of April 5, 2000, the Asset Purchase Agreement has
not been ratified by the Aspec Board of Directors
8. SEGMENT AND GEOGRAPHIC INFORMATION
As of February 29, 2000, the Company operated in four segments, Aspec
Technology, Inc., SIS Microelectronics, Inc, Inbox Corporation and EDA. SIS is
treated as a separate segment since SIS has separate financial information and
this is reported directly to the Chief Executive Officer. For quarter ended
February 29, 2000, Verilux and Chip & Chip are included together in EDA in the
tables below, and Novo is included with Inbox .
The activities of Verilux and Chip & Chip before and during the first
quarter of 2000 involved R&D expenditures and general administrative expenses.
Inbox Segment's activities for the first quarter ended February 29, 2000,
excluding IPRD charge and amortization of goodwill, involved mainly activities
surrounding Novo system maintenance revenue, R&D expenditures and general
administrative expenses.
<TABLE>
<CAPTION>
ASPEC SIS INBOX EDA CORPORATE COMPANY
------ ---- ------ ----- --------- -------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED FEBRUARY 29, 2000
Revenues............................. 887 369 310 -- -- 1,566
Loss before interest and tax......... (1,980) (433) (4,078) (486) (1,150) (8,127)
Depreciation and amortization........ 1,017 246 1,068 195 380 2,906
Assets............................... 6,218 450 17,670 2,848 21,104 48,290
Capital Expenditure on long-lived
assets............................. -- 11 140 319 3 473
QUARTER ENDED FEBRUARY 28, 1999
Revenues............................. 2,367 529 -- -- -- 2,896
Loss before interest and tax......... (3,562) (441) -- -- (1,206) (5,209)
Depreciation and amortization........ 1,317 230 -- -- 298 1,845
Assets............................... 8,933 834 -- -- 54,835 64,602
Capital Expenditure on long-lived
assets............................. 960 263 -- -- -- 1,223
</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
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ASPEC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
United States and therefore is not disclosed below. Geographic revenue for the
quarters ended February 29, 2000 and February 28, 2000, 1999 is as follows:
<TABLE>
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QUARTER ENDED
--------------------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
----------------- -----------------
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United States................................ $ 644,000 $1,959,000
Asia......................................... 727,000 902,000
Other International.......................... 195,000 35,000
---------- ----------
Total.............................. $1,566,000 $2,896,000
========== ==========
</TABLE>
Major Customers And International Sales -- For quarter ended February 29,
2000, two customer accounted for approximately 26% of revenue. For quarter ended
February 28, 1999 two customer accounted for approximately 28% of revenues.
9. CONTINGENCIES
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. 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.
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ASPEC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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-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 was accrued for as of
November 30, 1999.
On February 25, 2000, Aspec paid Cadabra $600,000 in full settlement.
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
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ASPEC TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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ITEM 2. 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 ICs. 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, fabless semiconductor companies, electronics systems manufacturers
and distributors that sell to such entities. 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.
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.
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 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.
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.
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(2) On March 8, 2000 the Company announced it will divest itself of
the EDA business to focus on business-to-business software. As of March 31,
2000, management had not identified any party with whom to affect the sale.
(3) 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 automated solutions for the
mission-critical, business-to-business, e-commerce product content and
management processes.
(4) Maintain focus on technological innovation, market growth and
create strategic relationships in order to grow the IEC content management
business.
The customers for IEC products include vertically integrated
self-sufficient manufacturers as well as horizontally integrated teams of
vendors. Inbox product 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. The Company's 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.
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.
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
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<PAGE> 15
horizontally integrated teams of vendors.) Inbox's IEC content management
software provides integrated workflow and immediate, ease-of-use functionality.
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.
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.
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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 will 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.
The Inbox business unit currently provides worldwide maintenance and
support for Zycad accelerators and these customers will continue to be supported
in the future. Updates to current customers using existing Zycad accelerators
and software will 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 OPERATION
A significant portion of the Company's revenue is derived from customers
outside the United States, and the Company anticipates that international
revenue will continue to account for a significant portion of its total revenue.
Revenue from customers outside the United States, substantially all of whom are
located in Asia, accounted for 28% and 44% of revenue for the first three months
of fiscal 1999 and 2000 respectively. Although the Company does not believe that
it experienced any material adverse impact in revenue as a result of the
financial dislocations that occurred in certain Asian countries during 1997 and
1998, it has experienced a lengthening of the payment period for accounts
receivables from certain Asian-based customers. At February 29, 2000
approximately 51% of the Company's accounts receivable (including unbilled
receivables) were from Asian-based customers. Although the Company currently
believes, based in part on continuing discussions with these customers, that its
existing accounting reserves are adequate given the estimated exposure related
to all of its accounts receivable, there can be no assurance that such
accounting reserves will prove to be adequate nor that present or future
dislocations in Asian countries or elsewhere or other factors
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<PAGE> 17
will not have a material adverse effect on the Company's ability to collect its
accounts receivable or on its business, operating results and financial.
OPERATING SEGMENTS
As of February 29, 2000, the Company operated in four segments, Aspec
Technology, Inc., SIS Microelectronics, Inc, Inbox Corporation and EDA. SIS is
treated as a separate segment since SIS has separate financial information and
this is reported directly to the Chief Executive Officer. For quarter ended
February 29, 2000, Verilux and Chip & Chip are included together in EDA in the
above tables, and Novo is included with Inbox.
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")). 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 and technology will provide advanced EDA tools to solve key design
problems. The activities of Verilux and Chip & Chip before and during the first
quarter of 2000 involved R&D expenditures and general administrative expenses.
The Company's Inbox 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. Inbox Segment's activities for the first quarter
ended February 29, 2000, excluding IPRD charge and amortization of goodwill,
involved mainly activities surrounding Novo system maintenance revenue, R&D
expenditures and general administrative expenses.
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RESULTS OF 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:
QUARTER ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
ASPEC TECHNOLOGY, INC.
SEGMENTED STATEMENT OF OPERATIONS
QUARTER ENDED FEBRUARY 29, 2000
($000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
ASPEC SIS INBOX EDA CORPORATE COMPANY
------ ---- ------ ---- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. 887 369 310 -- -- 1,566
Cost of Revenue...................... 2,163 319 229 -- -- 2,711
Gross Profit....................... (1,276) 50 81 -- -- (1,145)
Operating Expenses:
Research and development........... 301 98 872 304 -- 1,575
Sales and marketing................ 402 27 118 -- -- 547
General and administrative......... -- 148 1,186 -- 1,151 2,485
Write off In Process R&D........... -- -- 925 -- -- 925
Amortization -- goodwill........... -- 210 1,058 182 -- 1,450
------ ---- ------ ---- ------ ------
Total operating expenses... 703 483 4,159 486 1,151 6,982
Loss from operations................. (1,979) (433) (4,078) (486) (1,151) (8,127)
Interest and other income, net....... -- -- 5 (4) 158 159
------ ---- ------ ---- ------ ------
Net loss............................. (1,979) (433) (4,073) (490) (993) (7,968)
====== ==== ====== ==== ====== ======
</TABLE>
ASPEC TECHNOLOGY, INC.
SEGMENTED STATEMENT OF OPERATIONS
QUARTER ENDED FEBRUARY 29, 2000
(PERCENTAGES)
(UNAUDITED)
<TABLE>
<CAPTION>
ASPEC SIS INBOX EDA CORPORATE COMPANY
------ ------ ------- --- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................ 100% 100% 100% -- -- 100%
Cost of Revenue.................... 244% 86% 74% -- -- 173%
------ ------ ------- --- ----- -----
Gross Profit..................... (144%) 14% 26% -- -- (73%)
Operating Expenses:
Research and development......... 34% 27% 281% 100% -- 101%
Sales and marketing.............. 45% 7% 38% -- -- 35%
General and administrative....... -- 40% 382% 100% 100% 159%
Write off In Process R&D......... -- -- 298% -- -- 59%
Amortization -- goodwill......... -- 57% 342% 100% -- 93%
------ ------ ------- --- ----- -----
Total operating
expenses............... 79% 131% 1,342% 100% 100% 446%
Loss from operations............. (223%) (117%) (1,316%) 100% 100% (519%)
Interest and other income, net..... -- -- 2% 100% 100% 10%
Net loss........................... (223%) (117%) (1,314%) 100% 100% (509%)
</TABLE>
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ASPEC TECHNOLOGY, INC.
SEGMENTED STATEMENT OF OPERATIONS
QUARTER ENDED FEBRUARY 28, 1999
($000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
ASPEC SIS CORPORATE COMPANY
------ ---- --------- -------
<S> <C> <C> <C> <C>
Revenue................................................ 2,367 529 -- 2,896
Cost of Revenue........................................ 3,845 373 -- 4,218
Gross Profit......................................... (1,478) 156 -- (1,322)
Operating Expenses:
Research and development............................. 971 181 -- 1,152
Sales and marketing.................................. 1,113 -- -- 1,113
General and administrative........................... -- 249 1,206 1,455
Amortization -- goodwill............................. -- 167 -- 167
------ ---- ------ ------
Total operating expenses..................... 2,084 597 1,206 3,887
Loss from operations................................... (3,562) (441) (1,206) (5,209)
Interest and other income, net......................... -- -- 548 548
Net loss............................................... (3,562) (441) (658) (4,661)
</TABLE>
ASPEC TECHNOLOGY, INC.
SEGMENTED STATEMENT OF OPERATIONS
QUARTER ENDED FEBRUARY 28, 1999
(PERCENTAGES)
(UNAUDITED)
<TABLE>
<CAPTION>
ASPEC SIS CORPORATE COMPANY
----- ---- --------- -------
<S> <C> <C> <C> <C>
Revenue............................................... 100% 100% -- 100%
Cost of Revenue....................................... 162% 71% -- 146%
Gross Profit........................................ (62%) 29% -- (46%)
Operating Expenses:
Research and development............................ 41% 34% -- 40%
Sales and marketing................................. 47% -- -- 38%
General and administrative.......................... -- 47% 100% 50%
Amortization -- goodwill............................ -- 32% -- 6%
Total operating expenses.................... 88% 113% 100% 134%
Loss from operations.................................. (150%) (83%) 100% (179%)
Interest and other income, net........................ -- -- 100% 19%
Net loss.............................................. (150%) (83%) 100% (160%)
</TABLE>
REVENUES. Revenue for Aspec decreased by 63% from $2.4 million in the
quarter ended February 28, 1999 to $887,000 in the quarter ended February 29,
2000. The decline in revenue in the first three months of fiscal 2000 compared
with same period in fiscal 1999 was primarily attributable to the continued
decline of our SIP and design services businesses. Also, in first quarter, 2000
we have refocused our efforts on our new Inbox and EDA businesses further
contributing to a decline in revenue from our SIP businesses.
International revenue for Aspec accounted for 51% of revenue in the quarter
ended February 29, 2000 compared to 28% of revenue in the quarter ended February
28, 1999.
Revenue for SIS decreased by 30% from $529,000 in the quarter ended
February 28, 1999 to $369,000 in the quarter ended February 29, 2000. This
decrease in revenue in the first three months of fiscal 2000
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compared with the first three months in fiscal 1999 was attributable to the fact
that we have refocused our efforts on our new Inbox and EDA businesses further
contributing to a decline in revenue from our SIP businesses.
Revenue from Inbox for the period ended February 29, 2000 was $310,000
derived from the original Novo Systems maintenance business.
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 44% from $3.8 million in the first three months of fiscal 1999 compared to
$2.2 million with first the three months in fiscal 2000. Cost of revenue as a
percentage of revenue was 162% and 244% in the first three months of fiscal 1999
and fiscal 2000, respectively. The absolute dollar decrease in cost of revenue
and the increase in cost of revenue as a percentage of revenue in the first
three months of fiscal 2000, compared with first three months of fiscal 1999,
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 the first three months of fiscal 2000. 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 decreased by 15% from $373,000 in the
first three months of fiscal 1999 to $319,000 the first three months of fiscal
2000 Cost of revenue as a percentage of revenue was 71% and 86% in the first
three months of fiscal 1999 and fiscal 2000, respectively. The absolute dollar
decrease in cost of revenue and the increase in cost of revenue as a percentage
of revenue in the first three months of fiscal 2000 compared with the first
three months of fiscal 1999 , were due primarily to the decrease in revenue
levels.
Cost of revenue from Inbox for the period ended February 29, 2000 was
$229,000 and is related to the original Novo Systems maintenance business.
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 decreased by
69% from $971,000 in the first three months of fiscal 1999 to $301,000 in first
three months of fiscal 2000. Research and development expense as a percentage of
revenue was 41% and 34% in the first three months of fiscal 1999 and fiscal
2000, respectively. The absolute dollar decrease in research and development
expenses and the increase in research and development costs as a percentage of
revenue in the first three months of fiscal 2000, compared with the first three
months of fiscal 1999, was primarily due to the fact that we have refocused our
efforts on our new Inbox and EDA businesses and have not invested in the
development of the SIP businesses.
Research and development expenses for SIS decreased by 46% from $181,000 in
the first three months of fiscal 1999 to $98,000 in the first three months of
fiscal 2000. Research and development expense as a percentage of revenue was 34%
and 27% in the first three months of fiscal 1999 and fiscal 2000, respectively.
The absolute dollar decrease in research and development expenses and the
decrease in research and development expenses as a percentage of revenue in the
first three months of fiscal 2000, compared with the first three months of
fiscal 1999, was due to the fact that we have refocused our efforts on our new
Inbox and EDA businesses and have not invested in the development of the SIP
businesses.
Research and development expense for the Inbox and EDA Business was
$872,000 and $304,000 respectively in the first quarter of fiscal 2000.
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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 64% from $1.1 million in the first
three months of fiscal 1999 to $402,000 in the first three months of fiscal
2000. Sales and marketing expense as a percentage of revenue was 47% and 45% in
the first three months of fiscal 1999 and fiscal 2000, respectively. The
absolute dollar decreases in sales and marketing expenses in the first three
months of fiscal 2000, compared with the first three months of fiscal 1999, was
due to decreased headcount as well as lower expenses and commissions due to
lower sales volume.
Sales and marketing expenses for SIS was $0 and $27,000 in the first three
months of fiscal 1999 and fiscal 2000, respectively.
Sales and marketing expenses for the Inbox unit was $118,000.
GENERAL AND ADMINISTRATIVE. All of Aspec's general and administrative
expenses are part of Corporate expenses which includes Executives, Corporate
Finance, Legal and Human Resources departments. Corporate, general and
administrative expenses, decreased by 5% from $1.2 million in the first three
months of fiscal 1999 to $1.15 million in the first three months of fiscal 2000.
The absolute dollar decrease in general and administrative expenses in the first
three months of fiscal 2000, compared with the first three months of fiscal
1999, was due to decreased professional fees, as well as a decrease in the bad
debt expenses.
General and administrative expenses for SIS decreased by 41% from $249,000
in the first three months of fiscal 1999 to $148,000 million in the first three
months of fiscal 2000. General and administrative expenses as a percentage of
revenue were 47% and 40% in the first three months of fiscal 1999 and fiscal
2000, respectively. The absolute dollar decrease in general and administrative
expenses and in general and administrative as a percentage of revenue in fiscal
2000, compared with fiscal 1999, was due primarily to an decrease in shared
expenses and decreased revenue.
General and administrative expenses for the Inbox Unit was $1.2 million,
which includes $275,000 of severance expenses.
The $925,000 million written off to purchased technology in the first three
months of fiscal 2000 related to the acquisition of Inbox Software. The Company
also recorded $1.5 million in amortization expenses related to its acquisitions.
INTEREST AND OTHER INCOME, NET. Net interest and other income for Aspec
decreased by 71% from $548,000 million in the first three months of fiscal 1999
to $158,000 in the first three months of fiscal 2000. Net interest and other
income as a percentage of revenue was 19% and 10% in first three months of
fiscal 1999 and fiscal 2000, respectively. SIS had no interest or other income
in either the first three months of fiscal 1999 or the first three months of
fiscal 2000.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily from license revenue and
the net proceeds of $71.9 million from its initial public offering of Common
Stock in May 1998.
Our operating activities utilized net cash of $2.8 million in the three
month period ended February 28, 1999 and utilized net cash of $2.6 million in
the three month period ended February 29, 2000. Net cash used for operating
activities in the first quarter of fiscal 2000 was mainly due to a net loss of
$8 million.
Net cash used in investing activities was $3.6 million and $8.1 million in
the three month periods ended February 28, 1999 and 2000, respectively.
Investing activities for the first quarter of fiscal 2000 consisted primarily of
the investment in the Inbox Software Corporation and net purchases of property
and equipment.
21
<PAGE> 22
Net cash provided by financing activities was $3,000 and $337,000 in the
three month periods ended February 28, 1990 and 2000, respectively.
At February 29, 2000, the Company had cash and equivalents of $13.6
million. As of February 29, 2000, we had a retained deficit of $61.4 million and
working capital of (excluding customer and other advances) $12.1 million. We
anticipate approximately $0.5 million of capital expenditures over the next 12
months.
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.
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 continuation of the shift in industry pricing practice from
up-front license fees to a royalty based model; 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.
22
<PAGE> 23
A significant portion of the Company's revenue is recognized on a
percentage of completion method based upon actual costs incurred. The completion
period typically ranges from three months to a year. Accordingly, revenue in any
quarter is dependent on progress towards completion of the project by the
Company. In the past we have 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 the Company's
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
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, the Company's 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. Operating
expenses will be based in part on our expectations of future revenue from
product licenses. Accordingly, if we do not realize expected revenues, our
business, operating results and financial condition would be materially
adversely affected.
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 this regard, the Company successfully
recruited a President/Chief Executive Officer, Chief Financial Officer, and
several additional engineering personnel.
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.
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 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
23
<PAGE> 24
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:
Should Internet support as well as development of newer enabling
technologies not keep pace with its growth.
If secure encryption schemes cannot be successfully implemented and
gain the trust of industry.
The vast legal and governmental environments as well as future,
unforeseen laws and regulations create barriers to effective trade.
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 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
24
<PAGE> 25
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
During 1999, the Company 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 the Company transacts business had an
effective plan in place to address the Year 2000 issue, and determining the
extent of the Company's vulnerability to the failure of third parties to
remediate their own Year 2000 issue.
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 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.
25
<PAGE> 26
As of December 31, 1999, the cost of the Year 2000 project totaled
$146,000. The Company does not expect to incur significant costs during 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 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 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 -- Item 1 -- Legal Proceedings."
26
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 1. 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. 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
27
<PAGE> 28
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
8, 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-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.
On February 25, 2000, Aspec paid Cadabra $600,000 in full settlement.
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.
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<PAGE> 29
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
29
<PAGE> 30
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.
ASPEC TECHNOLOGY, INC.
Date: April 5, 2000 By: /s/ RAYMOND GRAMMER
------------------------------------
Raymond Grammer
Chief Financial Officer
30
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-START> DEC-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 13,566
<SECURITIES> 0
<RECEIVABLES> 2,141
<ALLOWANCES> (1,229)
<INVENTORY> 120
<CURRENT-ASSETS> 17,468
<PP&E> 19,558
<DEPRECIATION> (13,929)
<TOTAL-ASSETS> 48,290
<CURRENT-LIABILITIES> 11,233
<BONDS> 0
0
0
<COMMON> 100,215
<OTHER-SE> (63,480)
<TOTAL-LIABILITY-AND-EQUITY> 48,290
<SALES> 1,566
<TOTAL-REVENUES> 1,566
<CGS> 2,711
<TOTAL-COSTS> 6,982
<OTHER-EXPENSES> 67
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,968)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
