10-Q 1 f73929e10-q.txt FORM 10-Q 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 000-22565 INGENUUS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0298386 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 830 E. ARQUES AVENUE, SUNNYVALE, CA 94085 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 774-2199 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 May 31, 2001 was 36,853,062. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 INGENUUS CORPORATION FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2001 TABLE OF CONTENTS

i 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INGENUUS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

See accompanying notes to condensed consolidated financial statements. 1 4 INGENUUS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS

See accompanying notes to condensed consolidated financial statements. 2 5 INGENUUS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See accompanying notes to condensed consolidated financial statements. 3 6 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Ingenuus Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended May 31, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending November 30, 2001 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, 2000 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 28, 2001. 2. DISCONTINUED OPERATIONS On April 6, 2000, the Company sold its semiconductor intellectual property, library development and design tools and service business ("SIP Business") to DII Semiconductor Inc. ("DII") for $11.3 million ($5.5 million in cash and approximately $1 million due quarterly through October 2001). As a result, the operations of the SIP Business have been classified as discontinued operations in the accompanying Condensed Consolidated Financial Statements and related Notes. Revenues for the SIP Business were $1.3 million for the first quarter of fiscal 2000 and $729,000 through the date of disposal. 3. EARNINGS PER SHARE (EPS) DISCLOSURES Basic EPS excludes dilution and is computed by dividing net 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. The shares used for the calculation of diluted EPS excludes 1,235,000 common share equivalents related to purchase rights and options for Q2 2000, because the inclusion will have an anti-dilutive effect on EPS. 4. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. In July 1999, the Financial Accounting Standard Boards issued SFAS No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133." SFAS 137 deferred the effective date of SFAS 133 until the first fiscal quarter of the fiscal year beginning after June 15, 2000. The Company adopted SFAS 133 in the first quarter of fiscal 2001. The adoption of SFAS 133 and SFAS 137 is not expected to have a material effect on the Company's financial position or results of operations. 4 7 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management does not expect the adoption of SAB 101 to have a material effect on the Company's financial position or results of operations. The Company adopted SAB 101 in the first quarter of fiscal 2001. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB 25." FIN 44 becomes effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. 5. COMPREHENSIVE INCOME (LOSS) The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive Income." This statement requires companies to classify items of other comprehensive income by their components in the financial statements and display the accumulated balance of other comprehensive income separately from retained earnings in the equity section of a statement of financial position. The Company's total comprehensive income (loss) was as follows (in thousands):

6. INVESTMENTS Investment in Virage Logic In fiscal 1998, the Company made a private equity investment in Virage Logic Corp. ("Virage"), for an aggregate cost of $0.8 million. As of May 31, 2001, this investment is held at fair value and is classified in current assets, as the Company intends to realize this investment in the short term. As of May 31, 2001, the Company sold 500,000 of the 525,000 shares held, for $6.69 million of which 200,000 shares were sold in Q1 -- 2001 for $2.7 million. The unrealized gain of $0.31 million is recognized in accumulated other comprehensive income, in accordance with SFAS 115, "Accounting for certain investments in debt and equity securities". Impairment of investment in Slim Technology During the first quarter of fiscal 1999, the Company purchased a 40% interest in Slim Technology Co, Ltd., a Korean company, ("Slim Tech"), at a cost of $2.3 million. Slim Tech performs semiconductor design services for Korean customers. With the disposal of the SIP business in April 2000 and the Company's new focus as a software business to business collaborative commerce company, the investment in Slim Tech was no longer strategic to the Company's operations, and as a result, the Board of Directors authorized management to sell the investment. Based on a number of factors, including the failure to find a buyer for the investment and recurring operating losses generated from the investment, and in accordance with the provisions of APB 18 "The Equity Method of Accounting for Investments in Common Stock", management assessed that 5 8 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) there had been a permanent decline in the value of this investment. An impairment charge of $1.7 million was recorded in Q4 of fiscal 2000 to write down the value of the investment. 7. SALE OF CHIP & CHIP, INC. On June 13, 2000, the Company entered into an Asset Purchase Agreement with the management of Chip & Chip, part of the Electronic Design Automation ("EDA") segment of the company. Chip & Chip Management purchased the assets and certain liabilities of Chip & Chip Inc. ("Chip & Chip") for $2,580,000, (payable in three installments over the next two years). The proceeds are secured on 1 million Ingenuus shares and fully vested options to purchase 0.7 million shares held by Chip & Chip management, and 1 million shares of Chip & Chip. The gain of $292,000 from the sale has been deferred and will be recognized as the payments are received. The Company received the first installment of the sales consideration on the due date in the fourth quarter of fiscal 2000, $242,000 in cash and $633,000 by surrendering 500,000 shares of Ingenuus stock to the Company. The remaining two equal installments are due in October 2001 and July 2002. 8. PROPOSED SALE OF VERILUX DESIGN TECHNOLOGY On May 15, 2001, the Company gave Verilux Design Technology ("Verilux") employees one hundred twenty days notice to terminate employment with the Company. The Company is in the process of negotiating an Asset Purchase Agreement with the Management of Verilux, the Electronic Design Automation ("EDA") segment of the company. As of May 31, 2001, the Company has accrued all severance related to Verilux employees. As of July 5, 2001, the Company has not entered into a final agreement with Verilux Management. 9. SEGMENT AND GEOGRAPHIC INFORMATION As of May 31, 2001, the Company operated in two segments, EDA and Ingenuus. The EDA segment includes the development and sale of software tools for Electronic Design Automation, related to Verilux Design Technology ("Verilux"). The Ingenuus segment includes the business to business collaborative commerce solutions related to Inbox Software, Inc. ("InBox"), as well as the hardware and software maintenance services related to Novo Systems ("Novo"). For the six months ended May 31, 2001, Verilux is included in the EDA segment and Novo and Inbox are included in the Ingenuus segment. The activities of Verilux and Chip & Chip for the six months ended May 31, 2000 involved primarily research and development ("R&D") expenditures and general administrative expenses. 6 9 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The activities of the Ingenuus segment for the six months ended May 31, 2001, excluding amortization of goodwill, involved mainly activities surrounding product sales, system maintenance revenue, R&D expenditures and general administrative expenses.

Enterprise-wide information is provided in accordance with SFAS No. 131. Revenue is by country, based on the location of the customer. All property and equipment, except for an immaterial amount, is based in the United States and therefore is not disclosed below. Geographic revenue for each of the three month period ended May 31, 2001 and May 31, 2000 is as follows (in thousands):

Major Customers and International Sales -- For the quarter ended May 31, 2001, four customers accounted for 20.61%, 14.59%, 10.87% and 9.73% for a total 55.80% of revenue. For the quarter ended May 31, 2000, five customers accounted for 21.55%, 15.17%, 9.02%, 8.94% and 8.61% for a total of 63.29% of revenue. 7 10 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 10. STOCK REPURCHASE PROGRAM In March 2001 the Company approved a stock repurchase program in which up to $1,500,000 of its Common Stock may be purchased by the Company in the open market from time to time, depending upon market conditions, share price and other factors. As of June 28, 2001, Ingenuus had repurchased 429,000 shares of Common Stock at a total cost of $158,000. 11. CONTINGENCIES CLASS ACTION LAWSUITS On July 1, 1998, a class action lawsuit, Howard Jonas, et al. v. Aspec Technology, Inc., et al., No. CV-775037 ("the Jonas Complaint"), was filed in the Superior Court for the State of California, County of Santa Clara. The Jonas Complaint alleged that Aspec Technology, Inc. ("Aspec") and certain of its officers, directors and the underwriters of the Company's initial public offering, violated California Corporations Code Sections 25400 and 25500, and California Business and Professions Code Sections 17200 and 17500 by making false and misleading statements about Aspec's financial condition. The action was purportedly brought on behalf of all persons who purchased Aspec stock during the period from April 28, 1998 through June 25, 1998. On July 2, 1998, July 27, 1998, and August 17, 1998, three additional complaints were filed in state court against the Company and certain of its officers, directors, entitled respectively, William Neuman, et al. v. Aspec Technology, Inc., et al., No. CV-775089 ("the Neuman Complaint"); Martin L. Klotz, on behalf of the Martin Klotz Defined Benefit Profit Sharing Plan, et al. v. Aspec Technology, Inc., et al., No. CV-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. A fifth similar complaint, filed in federal court, was later dismissed. 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, which was purportedly brought on behalf of all persons who purchased Aspec's stock between April 27, 1998 and June 30, 1998, alleged that Aspec and certain of its officers and directors, as well as its underwriters, violated Sections 25400 and 25500 of the California Corporations Code, and Sections 11 and 15 of the Securities Act of 1933 (except as to the underwriters). On June 7, 1999, Aspec and certain of the individual defendants filed demurrers to the Consolidated Complaint (the "Aspec Defendants"). On June 9, 1999, the plaintiffs filed a motion for summary adjudication of their claims against Aspec under Section 11 of the Securities Act. The plaintiffs also moved to certify a plaintiff class. On August 26, 1999, the court heard argument on the defendants' demurrers. The court sustained the demurrers in part and overruled them in part. Specifically, the court held that the plaintiffs had not pleaded their claims under California Corporations Code Section 25400 with sufficient particularity and granted plaintiffs leave to amend this claim. The court overruled the defendants' demurrers to the Section 11 claim. Following that hearing, plaintiffs withdrew their motion for summary adjudication. Thereafter plaintiffs filed their First Amended Class Action Complaint, under seal, on October 18, 1999. On January 11, 2000, the defendants filed demurrers to Count I of the First Amended Complaint, which alleged claims under California Corporations Code Sections 25400/25500. The Aspec Defendants demurred to Count I on the basis that plaintiffs had not pleaded facts demonstrating that the defendants had acted with scienter. The Aspec Defendants also moved to strike certain allegations in the complaint. The motions were fully briefed, and the court heard oral argument on defendants' demurrers and motion to strike, and plaintiffs' motion for class certification on February 24, 2000. The court overruled the defendants' demurrers, denied the motion to strike and took the motion for class certification under submission. Thereafter, on March 13, 2000, 8 11 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) the Aspec Defendants answered the plaintiffs' unverified complaint, generally denying all allegations and asserting affirmative defenses. On March 16, 2000, the court certified a plaintiff class. On that same date, the Court found, sua sponte, that the case is complex, and pursuant to a pilot program implemented in the Superior Court for Santa Clara County, assigned it to a single judge for all purposes. The plaintiffs thereafter re-noticed their motion for summary adjudication of their Section 11 claim; based on stipulations between the parties, the defendants did not respond to the motion and that motion has not been heard. Thereafter, effective December 1, 2000, the parties and non-party Deloitte & Touche LLP, Aspec's former auditor, executed a Memorandum of Understanding, with the objective of settling the class action litigation. The settlement is subject to final court approval, it calls for Aspec (now known as Ingenuus Corporation) to pay $1.4 million into the settlement fund and upon final approval of the settlement by the court, to issue 1.75 million shares of common stock to the plaintiff class. A preliminary settlement hearing was held on April 16, 2001, at which the parties presented the stipulation of settlement and proposed orders to the Court for review. Thereafter, the court issued preliminary approving the settlement on May 17, 2001. A final settlement hearing is scheduled for July 13, 2001. As of November 30, 2000, the settlement cost has been accrued, including the stock element, using a price of $0.50 per share, the fair market value of the Company's common stock at November 30, 2000. DERIVATIVE LAWSUIT Certain of the Company's current and former officers, directors and shareholder entities were also named as defendants in a derivative lawsuit styled Linda Willinger, IRA, et al. v. Conrad Dell'Oca et al., No. CV-778007, filed on November 12, 1998, in the Superior Court of Santa Clara County. The derivative action alleges facts similar to those in the class action and also alleges that certain of the directors caused the Company to conduct the initial public offering in order to redeem 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 defendants' assent to the dismissal of their complaint and the filing of an amended complaint. Derivative Plaintiffs filed their First Amended Shareholders' Derivative Complaint on September 2, 1999. The Aspec Defendants demurred to that complaint on November 12, 1999, on the basis that the nominal plaintiffs had failed to make a demand on the Board of Directors before filing the derivative lawsuit, and that they had also failed to plead sufficient facts to excuse a pre-suit demand. After the matter was fully briefed, the court heard argument on January 25, 2000. On January 27, 2000, the court sustained the defendants' demurrers with sixty days' leave to amend. The parties later stipulated that the plaintiffs would have additional time in which to file an amended complaint, as well as to re-notice a motion to compel the production of electronically-stored documents and records from Aspec, as well as to notice the deposition of a witness from the Company to testify concerning the storage of such documents and records. On or about December 1, 2000 certain of the defendants, including nominal defendant, Aspec (now Ingenuus), the plaintiffs, and non-party Deloitte & Touche LLP, the Company's former auditor, executed a Memorandum of Understanding, with the objective of settling the derivative litigation. On February 23, 2001, at a hearing before Judge Conrad Rushing, the parties advised the Court that they had reached agreement on a Stipulation of Settlement, which they provided to the Court. The settlement would fully and finally settle and resolve the derivative litigation, including a dismissal of the action with prejudice as to all defendants. The Stipulation requires the Company to pay the derivative plaintiffs' attorneys' 9 12 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) fees in the amount of $395,000, as well as to make certain changes to the Company's audit committee charter. Upon the effective date, which includes the occurrence of the effective date of the separate Stipulation of Settlement to be approved by the Court in the Class Action, the parties to the Stipulation in the derivative litigation will release one another from claims arising from or relating to the derivative action, as set forth in the Stipulation. Thereafter, on March 6, 2001, the Court entered an Order approving the Stipulation of Settlement and dismissing the matter with prejudice as to all defendants. OTHER LITIGATION On June 21, 1999, a lawsuit entitled Cadabra Design Technology, Inc. v. Aspec Technology, Inc., No. CV-782691, was filed in the Superior Court, County of Santa Clara. Plaintiff's complaint sought damages in excess of $1 million for an alleged breach of a commercial software licensing agreement entered into by Cadabra Design Technology, Inc. ("Cadabra") and the Company on or about August 18, 1998. On August 6, 1999, the Company answered the complaint -- denying liability and asserting various affirmative defenses -- and filed a cross-complaint seeking damages according to proof and equitable relief for breach of contract, conversion, and negligent misrepresentation on the part of Cadabra. On February 16, 2000, the parties executed a Settlement Agreement and General Release in the case, pursuant to which the Company paid Cadabra $600,000 in full and final satisfaction of all claims related to the parties' software licensing agreement. On March 1, 2000, the case was dismissed in accordance with the parties' Settlement Agreement. Aspec Technology, Inc. v. Compaq Computers, Inc. was filed on December 28, 1998 in the Superior Court of California, Santa Clara County, No. CV778943. By the Company's complaint, they sought to collect the principal sum of $403,344, plus interest, attorneys' fees and costs, from Compaq, alleging that Compaq had breached a contract to purchase certain of the Company's library software. Compaq filed a counter claim alleging that the Company had breached the contract by failing to deliver in functional form the promised software on the schedule promised, as well as alleging fraudulent misrepresentation relating to the contract. The counter claim alleges unspecified damages in excess of $25,000. A settlement was entered into under which Compaq paid the Company $185,000. Dismissals of the lawsuit have been filed with the court by all parties. On September 23, 1999, a lawsuit entitled Lesley Nemeth v. Aspec Technology Inc., was filed in Superior Court, County of Santa Clara No. DC 383204. Plaintiff is a former consultant to the Company who seeks in her complaint damages in the sum of $12,600 plus interest and attorneys' fees. On November 23, 1999 the court ordered the matter to binding arbitration administered by the American Arbitration Association ("AAA"). Plaintiff filed her arbitration claim with the AAA on or about March 2, 2000. An arbitrator was appointed, and the arbitration was scheduled for September 8, 2000. The arbitration date was suspended by the AAA, and, as of this time, has not been rescheduled. The court case was dismissed by the court for failure by the plaintiff to appear at an arbitration review conference. Plaintiff has filed a motion to vacate the dismissal, which motion was granted by the court following a hearing on January 23, 2001. The matter remains in private arbitration before the AAA, with a hearing scheduled for August 14, 2001. Certain provisions of the Company's Certificate of Incorporation and indemnification agreements between the Company and its officers require the Company to advance to such officers ongoing legal expenses of defending the above lawsuits and may require the Company to indemnify them against judgments rendered on certain claims. The Company may incur significant legal expenses on its behalf and on behalf of such officers in connection with this litigation. In addition, defending this litigation has resulted, and will likely continue to result, in the diversion of management's attention from the day to day operations of the business. There can be no assurance that this stockholder litigation will be resolved in the Company's favor. An adverse result, settlement or prolonged litigation would have a material adverse effect on the business, financial condition, results of operations or cashflows. 10 13 INGENUUS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NASDAQ INQUIRY On December 19, 2000, the Company received notice from NASDAQ that the Company's common stock had failed to maintain a minimum bid price of $1.00 over the prior thirty (30) consecutive trading days as required by NASDAQ National Marketplace Rules (the "Rules"). The Company had until March 19, 2001 to regain compliance with the Rules or the Company's common stock would be subject to delisting from NASDAQ. Regaining compliance required, in part, that the Company's common stock trade at of above the $1.00 minimum price for ten (10) consecutive trading days. On March 20, 2001, the Company received notice from NASDAQ that the Company's common stock had failed to maintain NASDAQ's minimum bid price closing requirement of $1.00 and that such failure had continued beyond the ninety (90) day probationary period allowed under the Rules. The letter specified that, as a result of the Company's failure to maintain the minimum bid price closing requirement, the Company's common stock would be delisted at the close of business on March 28, 2001. However, the Company appealed the decision, and the delisting was stayed pending a hearing before the NASDAQ Qualifications Panel (the "Panel") on May 3, 2001. On June 15, 2001 the Company was notified that the Panel had granted Ingenuus continued listing of the Company's securities on The Nasdaq National Market pursuant to an exception that the Company had until June 26, 2001 to file proxy materials with the SEC and Nasdaq that included a proposal for a reverse stock split, and further that the Company had until July 26, 2001 to demonstrate a closing bid price of at least $1.00 per share and maintain such price for a minimum of ten (10) consecutive trading days thereafter. This proposal for a reverse stock split is subject to approval by Ingenuus stockholders at a special stockholders meeting to be held on July 24, 2001. If, following the reverse stock split, the per share price of the Company's common stock trades at or above $1.00 for ten (10) consecutive trading days, the Company believes NASDAQ may withdraw the delisting action. If the stockholders do not approve the reverse stock spit proposal and the stock price does not otherwise increase to greater than $1.00 per share, the Company expects the Company's common stock to be immediately delisted from NASDAQ. SEC INQUIRY In January 1999, the Company received an informal inquiry from the Securities and Exchange Commission ("SEC") Staff that the Company believes relates to the restatement of the Company's financial statements in 1998. The Company provided information in response to the SEC requests through March 1999 and has received no inquiries from the SEC since that time. 11 14 INGENUUS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This section -- 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. Such risks and uncertainties are set forth below and under "Other Factors Affecting Future Operating Results." COMPANY OVERVIEW During 2000, Ingenuus Corporation underwent a fundamental and rapid shift in business when it changed its name from Aspec Technology to Ingenuus Corporation (the "Company"), and sold its Semiconductor Intellectual Property ("SIP") business. The Company's SIP libraries consisted of logic functions based on gate array/embedded array or standard cell, I/Os and memories. SIP design tools included memory compilers, which allowed customers to generate memory libraries, as well as AdverPro software that managed the design process, provided an accurate timing function across Electronic Design Automation ("EDA") tools, and helped ensure compliance through proper design procedures. Along with the sale of its SIP libraries, the Company sold SIS Microelectronics Corporation ("SIS"), which had been acquired in April 1998 and had accounted for 34% of the Company's revenue in 1999. SIS delivered integrated system-level silicon solutions that combined the Company's extensive chip design experience with proprietary and partner intellectual property. The Company turned to EDA tools that would help engineers solve design problems. In late 1999, the Company purchased three research and development companies including Chip & Chip Inc. ("Chip & Chip"), Verilux Design Technology ("Verilux") and Novo Systems ("Novo") for their technology and expertise. Additionally, the Company purchased Inbox Software, Inc. ("Inbox"), a business-to-business software company that provided an automated product capable of managing document and engineering changes. In June 2000, the Company sold Chip & Chip and is currently attempting to sell Verilux. Using InBox and the power of the Internet, the Company retooled existing technology into the Manufacturing Change Manager(TM) ("MCM") solution that allows manufacturers to take control and command of the manufacturing change lifecycle. Today, all of the Company's energy is focused on MCM and complimentary new products. The Company's core competency is providing manufacturing centric, automated solutions that enable users to collaborate and share intellectual production and process data enterprise wide through the use of the Internet providing faster time to market. CLIENTS AND PARTNERS Many world-class manufacturing companies have started to enjoy the benefits of taking control and command of the entire manufacturing process, such as: - CIDCO Communications - Elantec Semiconductor - Hello Direct - Invensys 12 15 INGENUUS CORPORATION - Lucent Technologies - Mattson Technology - Pericom Semiconductor - Symmetricom The Company has established alliances with such top industry leaders as i2, Oracle and FileNet. In addition, we are a member of the Supply-Chain Council, an industry organization established in 1996 to create standards and improve supply chain processes among manufacturers, suppliers, distributors and retailers. THE MARKET We are focusing on change management generally associated with Collaborative Product Commerce ("CPC"), a second-generation e-business strategy surrounding the entire lifecycle of a product. The audience for such software is discrete and process manufacturers that want to communicate with supply chains around the world in a new way. Traditionally, information along the manufacturing supply chain has remained internal, with parts and pieces being divided among various groups that make up the manufacturing process. Many of these companies use the Internet during the process, but only as a publishing medium. ABOUT CPC AND C-COMMERCE Electronic Commerce, now globally accepted as e-commerce, is the electronic trade of goods and services. Over the past several years, e-commerce has enabled companies to conduct business online with secure and scalable order capture, management and routing. More and more people are using e-commerce to purchase products through the Internet. Electronic Data Interchange ("EDI"), or the electronic communication of business transactions between organizations, formed the foundation of e-commerce. Collaborative commerce, or c-commerce is the second generation of e-commerce solutions, providing the value and power of its predecessor. While e-commerce focuses on cost reduction, c-commerce focuses on new revenue opportunities by bringing more innovative products to market faster than the competition. Collaborative Product Commerce ("CPC") is a class of software and services that uses internet technology to permit individuals to collaboratively share intellectual data improving the development, manufacture and management of products throughout the entire life cycle. CPC delivers two primary benefits; it improves quality and capability by connecting islands or pockets of product knowledge into a single, extended experience base; and it collapses time and distance variables using the Internet to gain faster time to market. INTRODUCING THE MANUFACTURING CHANGE MANAGER(TM) MCM handles the life cycle of changes initiated from almost any point in the supply chain, including: - Customer change request/order ("CCR/CCO") - Supplier change request/order ("SCR/SCO") - Manufacturing change order ("MCO") - ISO change request/order ("ICR/ICO") - Engineering change request/order ("ECR/ECO") - Variation change order ("VCO") 13 16 INGENUUS CORPORATION - Continuous Improvement Initiatives ("CII") - Cost of change ("COC") With MCM, the manufacturing change process is automated, from start to finish. The process happens in real time over the Internet. MCM manages change from various sources, including manufacturers, suppliers, engineers, purchasers, quality control, ISO, customers, employee change requests and other types of change. CONSULTING SERVICES While MCM is expected to be our main revenue source in 2001, we also expect to derive revenue from delivery of professional services. Consultants will help clients define and refine internal change management processes, and help them better leverage their technology. Some professional services include: - System architecture and design - Ingenuus software installation and configuration - Enterprise Resource Planning ("ERP") integration. (ERP consists of large relational databases that generate data based on their own language.) - Computer Aided Design ("CAD") integration - Data conversion - Product training Costs for these professional consulting services are fixed. The process involves a review of the total project, the development of a phased implementation schedule, and project planning specific to the client's environment. MAINTENANCE SERVICES We offer standard support services, which include product updates, telephone and Internet support. Custom support services are also available, including standard support services plus technical management, application and educational services. RESULTS OF CONTINUING OPERATIONS OPERATING SEGMENTS As of May 31, 2001, the Company operated in two segments, EDA and Ingenuus. For the quarter and six months ended May 31, 2000, Verilux and Chip & Chip (prior to the sale on June 14, 2000) are included together in the EDA segment in the tables below. For the quarter and six months ended May 31, 2001, only Verilux is included in the EDA segment since Chip & Chip was sold on June 14, 2000. Novo and Inbox are included with Ingenuus for the quarter and six months ended May 31, 2000 and 2001. The Company's EDA business unit was formed with the acquisition and merger of Chip & Chip and Verilux in September 1999. These two EDA companies were acquired to address the most challenging problems in EDA. Each generation of semiconductor process advance brings new challenges in how integrated circuit designers model, integrate, simulate, and verify the entire chip and Systems on Chip ("SOC"). The Company's Ingenuus business unit was formed with the acquisition and merger of Novo in October 1999 and Inbox, in December 1999. Inbox's products provide intelligent Internet-enabled, business-to-business, IEC content management applications which shorten time-to-market by developing, capturing, transferring, sharing and leveraging the corporate expertise required to deliver and maintain content throughout the content supply chain whereas Novo provides system maintenance services. Ingenuus segment's 14 17 INGENUUS CORPORATION activities for the three and six month periods ended May 31, 2001, excluding amortization of goodwill, involved primarily activities surrounding product revenues from Inbox business, system maintenance revenue from the Novo business, research and development expenditures, sales and marketing and general administrative expenses. RESULTS OF OPERATIONS The following table sets forth selected statements of operations data expressed both in dollars (in thousands) and as a percentage of revenue for the three and six month period ending May 31, 2001 compared to the period ended May 31, 2000: INGENUUS CORPORATION SEGMENTED STATEMENT OF OPERATIONS DOLLARS (IN THOUSANDS) (UNAUDITED)

15 18 INGENUUS CORPORATION SEGMENTED STATEMENT OF OPERATIONS (PERCENTAGES) (UNAUDITED)

16 19 INGENUUS CORPORATION SEGMENTED STATEMENT OF OPERATIONS DOLLARS (IN THOUSANDS) (UNAUDITED)

17 20 INGENUUS CORPORATION SEGMENTED STATEMENT OF OPERATIONS (PERCENTAGES) (UNAUDITED)

Revenue. Revenue for Ingenuus decreased by 49% from $1.0 million in the quarter ended May 31, 2000, to $507,000 in the quarter ended May 31, 2001 and 27% from $1.3 million in the six months ended May 31, 2000 to $1.0 million in the six months ended May 31, 2001. The decrease in revenue is related to the slowing of the economy and 3 to 9 month sales cycle. Ingenuus hired most of the sales team in second half of Q1 - 2001, Revenue from the EDA segment for the quarter ended May 31, 2001 was $7,000 and resulted from the sale of maintenance of Verilux products. Revenue from the EDA segment for the quarter ended May 31, 2000 was $275,000 Cost of revenue. Cost of revenue for Ingenuus primarily represents the costs of products, personnel and other operating expenses incurred in the implementation phase of the Inbox product. Cost of revenue as a percentage of revenue increased by 19% from 96% of revenue for the six months ended May 31, 2000 to 115% of revenue for the six months ended May 31, 2001. The increase was due to the fact that the volume of products sold was lower than anticipated. Ingenuus Corporation has built up a professional and customer services team for the anticipated revenue. Research and development. Research and development expenses represent the cost of engineering personnel and other operating expenses incurred in the development and enhancement of our core technology. Research and development expenses for Ingenuus increased by 102% from $304,000 in the quarter ended May 31, 2000 to $615,000 in the quarter ended May 31, 2001. Research and development expenses as a percentage of revenue was 30% in the quarter ended May 31, 2000 compared to 121% in the quarter ended May 31, 2001. 18 21 Research and development expenses for the EDA segment related to Verulix for the quarter ended May 31, 2001, was $408,000 compared to $467,000 for the quarter ended May 31, 2000. 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 Ingenuus increased by 128% from $802,000 in the quarter ended May 31, 2000, to $1.8 million in the quarter ended May 31, 2001. Sales and marketing expense, as a percentage of revenue was 80% in the quarter ended May 31, 2000 and 361% in the quarter ended May 31, 2001. The absolute dollar increase in sales and marketing expenses in the quarter ended May 31, 2001, compared with the quarter ended May 31, 2000, was due to an increase in marketing expenses relating to promotion of our Ingenuus products and an increase in sales force. General and administrative. General and administrative expenses consist of salaries and expenses related to executives, corporate finance, legal and human resources departments. General and administrative expenses, decreased by 28% from $1.8 million in the quarter ended May 31, 2000, to $1.3 million in the quarter ended May 31, 2001. General and Administrative expenses as a percentage of revenue was 181% in the quarter ended May 31, 2000 and 247% in the quarter ended May 31, 2001. The absolute dollar decrease in general and administrative expenses in the quarter ended May 31, 2001, compared with the quarter ended May 31, 2000, was mainly due to decreased headcount, and lower fees related to professional services like legal expenses. The Company also recorded $1.1 million in amortization expenses in the second quarter of fiscal 2001, and $1.2 million in the second quarter of fiscal 2000, related to acquisitions in the last two years. Interest, and other income net. Net interest and other income for Ingenuus decreased 57% from $177,000 in the three months ended May 31, 2000 to $76,000 in the three months ended May 31, 2001, due to the decline in the cash balance. Foreign Currency. Balance sheet accounts of Ingenuus' foreign subsidiary in Japan are translated into U.S. dollars at exchange rates prevailing at balance sheet dates. Revenue, costs and expenses are translated into U.S. dollars at average rates for the period. Gains and losses resulting from foreign exchange transactions are included in the statement of operations and were not significant during the period presented. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations primarily from license revenue and the net proceeds of $71.9 million from the initial public offering of our common stock in May 1998. Our operating activities utilized net cash of $9.7 million in the six month period ended May 31, 2001 and $9.6 million in the six month period ending May 31, 2000. Net cash for operating activities in the first six months of fiscal 2000 and 2001 was due to the significant net losses incurred for these periods. Net cash provided from investing activities was $6.7 million, in the six month period ending May 31, 2001. Net cash used in investing activities was $9.9 million, in the six-month period ending May 31, 2000. Investing activities for the six months period ending May 31, 2001 included monies received from the sale of our discontinued business and the sale of shares of Virage Logic. Net cash used in six months period ending May 31, 2000 consisted primarily of the investment in Inbox and net purchases of property and equipment. Net cash utilized by financing activities was $ 135,000 in the six-month period ending May 31, 2001. Net cash provided by financing activities was $192,000 in the six month periods ended May 31, 2000. Net cash used in six months period ending May 31, 2001 consisted primarily of repurchase of common stock. Net cash provided from financing activities in six months period ending May 31, 2000 consisted primarily of proceeds from issuance of common stock. At May 31, 2001, we had cash and cash equivalents of $7.7 million. As of May 31, 2001, we had a retained deficit of $77.8 million and working capital of $7.5 million. 19 22 We have suffered recurring losses in fiscal 2000, 1999 and 1998. Our 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 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, - other factors. Based on our budget, we believe that our current cash and investment balances together with any cash generated from operations will be sufficient to meet our operating and capital requirements for at least the next 12 months. We may require additional funds in the future and there is a risk that financing may not be on terms favorable to us, if available at all. OTHER FACTORS AFFECTING FUTURE OPERATING RESULTS POSSIBLE CHALLENGES TO SUCCESS WE MAY NOT BE SUCCESSFUL IN MARKETING THE MCM PRODUCT Our future depends on our ability to enhance and expand our MCM product, and to introduce new products as technology allows. There is still no assurance that we will be successful in marketing the MCM product. We may also experience release delays that are costly, can harm our business and can result in possible litigation. Other possible risks include: - Manufacturers resisting change, - Companies and customers being lacking cash due to inflation or other economic shifts, - Miscalculating the need for the MCM product if manufacturers are not ready to enjoy the benefits of a fully automated system, - Misappropriation of the Company's technology or copyright infringement; and - Diversion of resources due to litigation, including propriety rights issues. THE INTRODUCTION OF A COMPETING PRODUCT BY A LARGE COMPANY COULD HAVE AN ADVERSE EFFECT ON SALES We must deliver the MCM product to the marketplace before a competing company provides a similar whole solution. If a competitor with better name recognition were to produce a comprehensive manufacturing change product, it could have an adverse affect on our financial condition. IF WE DO NOT ESTABLISH OUR NAME IN THE INDUSTRY, OUR BUSINESS COULD BE HARMED We are a small, relatively unknown company and, as such, we are a new player in the manufacturing change marketplace. There may be resistance to purchasing a product from such a new player because there may be concern about our viability. If customers resist the idea of having an unknown company supply their manufacturing change needs, such resistance could have an adverse affect on our financial condition. IF WE DO NOT ESTABLISH A FIRM CUSTOMER BASE, OUR BUSINESS COULD BE HARMED If our sales team is not successful in closing sales with major manufacturers, this will have an adverse effect on our overall sales plan and on the financial condition of the company. 20 23 THE MANUFACTURING INDUSTRY MAY RESIST CHANGING TO OUR PLATFORM Manufacturers have invested substantial funds in systems that are already in place and may resist the idea of a basic platform, fearing that it may be not flexible enough to meet their individual needs. Such resistance may have an adverse affect on our financial condition. PRODUCT DEFECTS MAY HARM OUR BUSINESS Like any new software product, the MCM software may have some "bugs" or defects that could appear after a company has purchased and installed the software. Such occurrences could have an adverse affect on our financial condition because the customer may be unsatisfied, there may be additional labor costs incurred in fixing it, and shipments of other products may be delayed. A RECESSION OR ECONOMIC DOWNFALL WOULD HARM OUR BUSINESS If a recession or economic downfall occurs, it will mean difficult times for most companies and may have an adverse affect on our financial condition. RISKS OF OUR INTERNATIONAL SALES COULD HARM OUR BUSINESS While we continue to market our products to the international market, there are a number of risks inherent when dealing with foreign companies. Some of those risks include: - Economic recessions and political instability, - Exchange rate fluctuations, - Extended accounts receivables and difficulty collecting, - Difficulty in managing both sales representatives and distributors, - Unexpected changes in regulatory requirements, - Reduced or limited protection for intellectual property rights, - Export license requirements and documentation, and - Tariffs and possible adverse tax consequences. OUR FUTURE OPERATING RESULTS ARE EXPECTED TO FLUCTUATE AND WE DEPEND UPON TIMELY PROJECT COMPLETION Our operating results have fluctuated in the past and are expected to fluctuate significantly on a quarterly and annual basis in the future as a result of a number of factors including: - the size and timing of customer orders, - the length of our sales cycle, - the timing of new product announcements and introductions by us and our competitors, - our ability to successfully develop, introduce and market new products and product enhancements, - market acceptance of our products, - the cancellation or delay of orders from major customers, - the level of changes to customer requirements due to specific changes requested by customers, - our ability to retain our existing personnel and hire additional personnel, and - general economic conditions. These and other factors could have a material adverse effect on our business, operating results and financial condition. 21 24 In addition, our contracts may generally be canceled without cause, and if a customer cancels or delays performance under any such contracts, our business, operating results and financial condition could be materially adversely affected. A customer's license of our products may involve a significant commitment of capital with the attendant delays frequently associated with authorization procedures for capital expenditures within customer organizations. Our operating expenses will be based in part on our expectations of future revenue from product licenses. Accordingly, if we do not realize our expected revenues, our business, operating results, and financial condition could be materially adversely affected. ANY ACQUISITIONS MAY NOT BE SUCCESSFUL From time to time, we expect to evaluate potential acquisitions to build our expertise. There can be no assurance that: - we will be able to identify attractive acquisition candidates, - that we will be able to successfully complete any such acquisition, or - that we will be able to integrate any acquired company with our other operations. In connection with 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. WE DEPEND UPON CONTINUOUS PRODUCT DEVELOPMENT AND HAVE THE RISK OF PRODUCT DELAYS. Our customers are subject to: - rapid technological change, - frequent introductions of new products, - short product life cycles, - changes in customer demands and requirements, and - evolving industry standards. WE DEPEND ON KEY PERSONNEL. Our business depends in significant part on the continued service of our executive officers and other senior management and key employees, including certain technical, managerial and marketing personnel. The loss of the services of any of these individuals or groups of individuals could have a material adverse effect on our business, operating results and financial condition. None of our executive officers have an employment agreement with us. We believe that our future business results will depend in significant part upon our ability to identify, attract, motivate and retain additional highly skilled technical, managerial and marketing personnel. In addition we believe our future success will depend on our ability to identify, attract, hire and retain skilled employees and to hire replacements for employees that leave us. Competition for such personnel in the computer software industry is intense. We have currently engaged in a search for several additional engineering personnel. There can be no assurance we will be successful in identifying, attracting and retaining such personnel, and the failure to do so could have a material adverse effect on our business, operating results and financial condition. 22 25 OUR SHARE PRICE IS VOLATILE. Since our initial public offering in April 1998, the market price of our Common Stock has been highly volatile and is expected to be significantly affected by factors such as: - actual or anticipated fluctuations in our operating results, - our failure to meet or exceed published earnings estimates, - changes in earnings estimates or recommendations by securities analysts, - announcements of technological innovations, - new products or new contracts by us or our existing or potential competitors, - developments with respect to patents, copyrights or proprietary rights, - adoption of new accounting standards affecting the software industry, and - general market conditions. 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 our common stock. In June 1998, securities class action litigation was filed against us and certain of our executive officers and directors. The parties have entered into a settlement agreement, but preliminary and final court approvals have not yet been granted. See Part II Item 1 -- Legal Proceedings ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. We currently have funds in foreign currency, which are translated to U.S. dollars. Hence, strengthening of the dollar may result in a decrease in the value when converted to U.S. dollars. Interest income is sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in short-term instruments calculated at variable rates. We have established policies and business practices regarding our investment portfolio to preserve principal while obtaining reasonable rates of return without significantly increasing risk. We place our investments with high credit quality issuers according to our investment policy. We do not use derivative financial instruments in our investment portfolio. All investments are carried at cost, which approximates market value. Due to the short-term nature of our investments and the immaterial amount of our debt obligation, we believe that there is no material exposure to interest fluctuation. Therefore, no accompanying table has been provided. 23 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CLASS ACTION LAWSUITS On July 1, 1998, a class action lawsuit, Howard Jonas, et al. v. Aspec Technology, Inc., et al., No. CV-775037 ("the Jonas Complaint"), was filed in the Superior Court for the State of California, County of Santa Clara. The Jonas Complaint alleged that Aspec Technology, Inc. ("Aspec") and certain of its officers, directors and the underwriters of the Company's initial public offering, violated California Corporations Code Sections 25400 and 25500, and California Business and Professions Code Sections 17200 and 17500 by making false and misleading statements about Aspec's financial condition. The action was purportedly brought on behalf of all persons who purchased Aspec stock during the period from April 28, 1998 through June 25, 1998. On July 2, 1998, July 27, 1998, and August 17, 1998, three additional complaints were filed in state court against the Company and certain of its officers, directors, entitled respectively, William Neuman, et al. v. Aspec Technology, Inc., et al., No. CV-775089 ("the Neuman Complaint"); Martin L. Klotz, on behalf of the Martin Klotz Defined Benefit Profit Sharing Plan, et al. v. Aspec Technology, Inc., et al., No. CV-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. A fifth similar complaint, filed in federal court, was later dismissed. 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, which was purportedly brought on behalf of all persons who purchased Aspec's stock between April 27, 1998 and June 30, 1998, alleged that Aspec and certain of its officers and directors, as well as its underwriters, violated Sections 25400 and 25500 of the California Corporations Code, and Sections 11 and 15 of the Securities Act of 1933 (except as to the underwriters). On June 7, 1999, Aspec and certain of the individual defendants filed demurrers to the Consolidated Complaint (the "Aspec Defendants"). On June 9, 1999, the plaintiffs filed a motion for summary adjudication of their claims against Aspec under Section 11 of the Securities Act. The plaintiffs also moved to certify a plaintiff class. On August 26, 1999, the court heard argument on the defendants' demurrers. The court sustained the demurrers in part and overruled them in part. Specifically, the court held that the plaintiffs had not pleaded their claims under California Corporations Code Section 25400 with sufficient particularity and granted plaintiffs leave to amend this claim. The court overruled the defendants' demurrers to the Section 11 claim. Following that hearing, plaintiffs withdrew their motion for summary adjudication. Thereafter plaintiffs filed their First Amended Class Action Complaint, under seal, on October 18, 1999. On January 11, 2000, the defendants filed demurrers to Count I of the First Amended Complaint, which alleged claims under California Corporations Code Sections 25400/25500. The Aspec Defendants demurred to Count I on the basis that plaintiffs had not pleaded facts demonstrating that the defendants had acted with scienter. The Aspec Defendants also moved to strike certain allegations in the complaint. The motions were fully briefed, and the court heard oral argument on defendants' demurrers and motion to strike, and plaintiffs' motion for class certification on February 24, 2000. The court overruled the defendants' demurrers, denied the motion to strike and took the motion for class certification under submission. Thereafter, on March 13, 2000, the Aspec Defendants answered the plaintiffs' unverified complaint, generally denying all allegations and asserting affirmative defenses. On March 16, 2000, the court certified a plaintiff class. On that same date, the Court found, sua sponte, that the case is complex, and pursuant to a pilot program implemented in the Superior Court for Santa Clara County, assigned it to a single judge for all purposes. The plaintiffs thereafter re-noticed their motion for summary adjudication of their Section 11 claim; based on stipulations between the parties, the defendants did not respond to the motion and that motion has not been heard. 24 27 Thereafter, effective December 1, 2000 the parties and non-party Deloitte & Touche LLP, Aspec's former auditor, executed a Memorandum of Understanding, with the objective of settling the class action litigation. The settlement is subject to final court approval; it calls for Aspec (now known as Ingenuus Corporation) to pay $1.4 million into the settlement fund and upon final approval of the settlement by the court, to issue 1.75 million shares of common stock to the plaintiff class. A preliminary settlement hearing was held on April 16, 2001, at which the parties presented the stipulation of settlement and proposed orders to the Court for review. Thereafter, the Court issued orders preliminarily approving the settlement on May 17, 2001. A final settlement hearing is scheduled for July 13, 2001. As of November 30, 2000, the settlement cost has been accrued, including the stock element, using a price of $0.50 per share, the fair market value of the Company's common stock at November 30, 2000. DERIVATIVE LAWSUIT Certain of the Company's current and former officers, directors and shareholder entities were also named as defendants in a derivative lawsuit styled Linda Willinger, IRA, et al. v. Conrad Dell'Oca et al., No. CV-778007, filed on November 12, 1998, in the Superior Court of Santa Clara County. The derivative action alleges facts similar to those in the class action and also alleges that certain of the directors caused the Company to conduct the initial public offering in order to redeem 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 defendants' assent to the dismissal of their complaint and the filing of an amended complaint. Derivative Plaintiffs filed their First Amended Shareholders' Derivative Complaint on September 2, 1999. The Aspec Defendants demurred to that complaint on November 12, 1999, on the basis that the nominal plaintiffs had failed to make a demand on the Board of Directors before filing the derivative lawsuit, and that they had also failed to plead sufficient facts to excuse a pre-suit demand. After the matter was fully briefed, the court heard argument on January 25, 2000. On January 27, 2000, the court sustained the defendants' demurrers with sixty days' leave to amend. The parties later stipulated that the plaintiffs would have additional time in which to file an amended complaint, as well as to re-notice a motion to compel the production of electronically-stored documents and records from Aspec, as well as to notice the deposition of a witness from the Company to testify concerning the storage of such documents and records. On or about December 1, 2000 certain of the defendants, including nominal defendant, Aspec (now Ingenuus), the plaintiffs, and non-party Deloitte & Touche LLP, the Company's former auditor, executed a Memorandum of Understanding, with the objective of settling the derivative litigation. On February 23, 2001, at a hearing before Judge Conrad Rushing, the parties advised the Court that they had reached agreement on a Stipulation of Settlement, which they provided to the Court. The settlement would fully and finally settle and resolve the derivative litigation, including a dismissal of the action with prejudice as to all defendants. The Stipulation requires the Company to pay the derivative plaintiffs' attorneys' fees in the amount of $395,000, as well as to make certain changes to the Company's audit committee charter. Upon the effective date, which includes the occurrence of the effective date of the separate Stipulation of Settlement to be approved by the Court in the Class Action, the parties to the Stipulation in the derivative litigation will release one another from claims arising from or relating to the derivative action, as set forth in the Stipulation. Thereafter, on March 6, 2001, the Court entered an Order approving the Stipulation of Settlement and dismissing the matter with prejudice as to all defendants. OTHER LITIGATION On June 21, 1999, a lawsuit entitled Cadabra Design Technology, Inc. v. Aspec Technology, Inc., No. CV-782691, was filed in the Superior Court, County of Santa Clara. Plaintiff's complaint sought damages in excess of $1 million for an alleged breach of a commercial software licensing agreement entered into by Cadabra Design Technology, Inc. ("Cadabra") and the Company on or about August 18, 1998. On August 6, 25 28 1999, the Company answered the complaint -- denying liability and asserting various affirmative defenses -- and filed a cross-complaint seeking damages according to proof and equitable relief for breach of contract, conversion, and negligent misrepresentation on the part of Cadabra. On February 16, 2000, the parties executed a Settlement Agreement and General Release in the case, pursuant to which the Company paid Cadabra $600,000 in full and final satisfaction of all claims related to the parties' software licensing agreement. On March 1, 2000, the case was dismissed in accordance with the parties' Settlement Agreement. Aspec Technology, Inc. v. Compaq Computers, Inc. was filed on December 28, 1998 in the Superior Court of California, Santa Clara County, No. CV778943. By the Company's complaint, they sought to collect the principal sum of $403,344, plus interest, attorneys' fees and costs, from Compaq, alleging that Compaq had breached a contract to purchase certain of the Company's library software. Compaq filed a counter claim alleging that the Company had breached the contract by failing to deliver in functional form the promised software on the schedule promised, as well as alleging fraudulent misrepresentation relating to the contract. The counter claim alleges unspecified damages in excess of $25,000. A settlement was entered into under which Compaq paid the Company $185,000. Dismissals of the lawsuit have been filed with the court by all parties. On September 23, 1999, a lawsuit entitled Lesley Nemeth v. Aspec Technology Inc., was filed in Superior Court, County of Santa Clara No. DC 383204. Plaintiff is a former consultant to the Company who seeks in her complaint damages in the sum of $12,600 plus interest and attorneys' fees. On November 23, 1999 the court ordered the matter to binding arbitration administered by the American Arbitration Association ("AAA"). Plaintiff filed her arbitration claim with the AAA on or about March 2, 2000. An arbitrator was appointed, and the arbitration was scheduled for September 8, 2000. The arbitration date was suspended by the AAA, and, as of this time, has not been rescheduled. The court case was dismissed by the court for failure by the plaintiff to appear at an arbitration review conference. Plaintiff has filed a motion to vacate the dismissal, which motion was granted by the court following a hearing on January 23, 2001. The matter remains in private arbitration before the AAA, with a hearing scheduled for August 14, 2001. Certain provisions of the Company's Certificate of Incorporation and indemnification agreements between the Company and its officers require the Company to advance to such officers ongoing legal expenses of defending the above lawsuits and may require the Company to indemnify them against judgments rendered on certain claims. The Company may incur significant legal expenses on its behalf and on behalf of such officers in connection with this litigation. In addition, defending this litigation has resulted, and will likely continue to result, in the diversion of management's attention from the day to day operations of the business. There can be no assurance that this stockholder litigation will be resolved in the Company's favor. An adverse result, settlement or prolonged litigation would have a material adverse effect on the business, financial condition, results of operations or cashflows. NASDAQ INQUIRY On December 19, 2000, the Company received notice from NASDAQ that the Company's common stock had failed to maintain a minimum bid price of $1.00 over the prior thirty (30) consecutive trading days as required by NASDAQ National Marketplace Rules (the "Rules"). The Company had until March 19, 2001 to regain compliance with the Rules or the Company's common stock would be subject to delisting from NASDAQ. Regaining compliance required, in part, that the Company's common stock trade at of above the $1.00 minimum price for ten (10) consecutive trading days. On March 20, 2001, the Company received notice from NASDAQ that the Company's common stock had failed to maintain NASDAQ's minimum bid price closing requirement of $1.00 and that such failure had continued beyond the ninety (90) day probationary period allowed under the Rules. The letter specified that, as a result of the Company's failure to maintain the minimum bid price closing requirement, the Company's common stock would be delisted at the close of business on March 28, 2001. However, the Company appealed the decision, and the delisting was stayed pending a hearing before the NASDAQ Qualifications Panel (the "Panel") on May 3, 2001. 26 29 On June 15, 2001 the Company was notified that the Panel had granted Ingenuus continued listing of the Company's securities on The Nasdaq National Market pursuant to an exception that the Company had until June 26, 2001 to file proxy materials with the SEC and Nasdaq that included a proposal for a reverse stock split, and further that the Company had until July 26, 2001 to demonstrate a closing bid price of at least $1.00 per share and maintain such price for a minimum of ten (10) consecutive trading days thereafter. This proposal for a reverse stock split is subject to approval by Ingenuus stockholders at a special stockholders meeting to be held on July 24, 2001. If, following the reverse stock split, the per share price of the Company's common stock trades at or above $1.00 for ten (10) consecutive trading days, the Company believes NASDAQ may withdraw the delisting action. If the stockholders do not approve the reverse stock spit proposal and the stock price does not otherwise increase to greater than $1.00 per share, the Company expects the Company's common stock to be immediately delisted from NASDAQ. SEC INQUIRY In January 1999, the Company received an informal inquiry from the Securities and Exchange Commission ("SEC") Staff that the Company believes relates to the restatement of the Company's financial statements in 1998. The Company provided information in response to the SEC requests through March 1999 and has received no inquiries from the SEC since that time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on Wednesday, May 16, 2001 at 3:00 p.m., local time, in Sunnyvale, California. (a) The following nominees for director of the Company were elected. Each person elected as a director will serve until the next annual meeting of stockholders or until such person's successor is elected and qualified:

(b) The Company's stockholders approved an amendment to the Company's 1997 Director Stock Option Plan to increase the initial number of shares granted to outside directors upon the date such persons first become outside directors, with 26,162,902 votes in favor, 2,488,691 votes against and 13,888 votes abstaining. (c) The Company's stockholders ratified the appointment of Moss Adams L.L.P. as independent auditors for the Company for the 2001 fiscal year, with 28,452,361 votes in favor, 177,515 votes against and 35,604 votes abstaining. 27 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.4 Ingenuus's 1997 Director Stock Option Plan. 10.8 Ingenuus's 2000 Stock Plan (b) Reports on Form 8-K. (1) We filed a current report on Form 8-K dated March 9, 2001, related to the resignation of PricewaterhouseCoopers LLP as Ingenuus's independent accountants. (2) We filed a current report on Form 8-K dated March 23, 2001, related to the engagement of Moss Adams L.L.P. as Ingenuus's new independent accountants. 28 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INGENUUS CORPORATION. By: /s/ DOUGLAS E. KLINT ------------------------------------ Douglas E. Klint Vice President, Secretary, and General Counsel Date: July 9, 2001 29

INGENUUS CORP 10-Q