<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 1995 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 0-18623
_______________________
IKOS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0100318
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
19050 Pruneridge Avenue, Cupertino, CA 95014
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(408) 255-4567
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such report), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The approximate aggregate market value of the registrant's Common Stock held by
non-affiliates as of November 15, 1995, was approximately $88,930,000.
As of November 15, 1995, approximately 7,044,000 shares of the registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders are
incorporated by reference in Part III hereof.
This report (excluding exhibits) contains 35 pages. The Index to Exhibits
begins on Page 19 of this report.
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PART I
ITEM 1. BUSINESS
GENERAL
IKOS Systems, Inc. ("IKOS" or the "Company") designs, develops,
manufactures, markets and supports high-performance hardware-assisted systems
for simulation of integrated circuits (ICs) and IC-based electronic systems. The
Company's strategy is to serve the needs of a growing universe of IC designers
for fast, accurate simulation of complex IC designs through its family of
hardware and software simulation systems. Headquartered in Cupertino,
California, IKOS supports a direct sales operation in North America, France, and
Germany, and a distributor network covering the remainder of Europe and in Asia.
IKOS is publicly traded on the Nasdaq National Market (NASDAQ) under the symbol
IKOS.
IKOS specializes in the Electronic Design Automation (EDA) market. The
Company's products are used by designers of electronic systems to determine
whether a system design functions properly prior to incurring the cost and
time to build the actual system, thereby producing a more efficient design
process. This is a critical step in the design process because the manufacture
of electronic systems which contain large amounts of ASICs or full custom
circuits is expensive and time consuming. Logic simulation of system
components, or entire systems, is much more cost effective than finding design
problems after manufacturing a prototype system. The Company sells its products
to a broad range of customers in the communications, semiconductor,
multimedia/graphics, computer, aerospace and consumer electronics industries,
such as S3, Cirrus Logic, Advanced Micro Devices, SGS-Thomson Microelectronics,
Texas Instruments, AT&T and Fuji-Xerox.
BACKGROUND
There has been substantial growth in the market for high performance, complex
ICs for communications, multimedia, graphics, computing and other application
products. These application products have been enabled, in significant part, by
improvements in silicon process technology which have made possible the design
and manufacture of increasingly complex, high performance ICs. Semiconductor
manufacturers have integrated an increasing number of functions onto a single
IC, causing the complexity of these semiconductor devices to increase
exponentially over the last 15 years. Designers currently are creating ICs
consisting of, in some cases, millions of gates implemented in deep submicron,
or less than 0.6 micron, geometries.
The EDA industry has provided technology and design automation tools which have
been essential to the advances that have occurred within the electronics
industry over the last 20 years. EDA was first used to help manage design
complexity in the 1970's with computer-aided design tools for automating the
design of the physical layout of ICs and printed circuit boards. In the early
1980's, computer-aided engineering ("CAE") was introduced to further manage
the complexity of logic design. In the late 1980's, the development of high
level design automation ("HLDA") tools enabled design creation that was faster
and at higher levels of abstraction than previous CAE tools. Hardware
description languages such as IEEE standard "VHDL" or VHSIC Hardware Description
Language (VHSIC stands
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for Very High Speed Integrated Circuit) and Verilog were used to create complex
designs expressed in English. These languages, which act in a manner similar to
high level software languages such as C++, Cobol and Fortran, allow the
expression of design ideas and functionality at a level that is independent of
the silicon implementation. Logic synthesis is then used to convert the
language-based design to the detailed gate level description required for
physical layout tools that generate manufacturing information. However, while
EDA design tools have brought greater efficiency and productivity to the IC
design process, advances in EDA simulation technology have not kept pace with
the requirements for simulating more complex IC designs.
Simulation is the process of utilizing computer models of circuit logic and test
programs to evaluate the functionality and performance of the designed
electronic circuits before committing to prototyping the actual design. The
individual components of an IC may be represented at different levels of
abstraction. For example, an IC can be described at different levels of detail
or hierarchy, ranging from transistors to gates (typically groups of four
transistors) to functional or behavioral blocks, which can be comprised of a
large number of gates. The traditional approach to simulation, before the advent
of language-based design, was at the gate level. Language-based or functional
simulation creates an opportunity to simulate designs earlier in the design
cycle, or at the functional or behavioral block level, before the gate level
structure of a design is known. Software simulators operating on general purpose
workstations are customarily used to verify the high level specifications and
detect design inconsistencies
With the advancing complexity of IC designs, simulation of such IC designs has
become increasingly difficult to accomplish because increased functional
complexity demands more thorough verification, increased gate count demands more
simulation capacity and increased gate density demands more timing accuracy. The
Company believes that the need for accurate and timely simulation and
verification of complex IC designs cannot be satisfied by existing software
simulators operating on general purpose workstations. Due to lack of simulation
capacity, software simulation of complex IC designs at the lower, or gate, level
of abstraction can take multiple hours or days to be completed. Software
simulators can verify more complex designs by simulating at higher, or the
behavioral, level of abstraction but without the ability to accurately model
timing information required for the interconnection of gates and transistors of
the IC. The Company believes that this high level simulation is not sufficiently
comprehensive because timing problems inherent in complex ICs have not been
effectively addressed at the behavioral level.
COMPANY SOLUTIONS
The Company believes that rapid and comprehensive simulation of complex ICs
(defined as designs with 100,000 or more gates) can best be achieved by
simulation systems incorporating dedicated hardware and software. The
combination of these technologies enable the iterative, mixed-level simulation
demanded by the complex IC designs. Simulation most efficiently begins at the
behavioral level so that architectural problems can be found before the time and
effort is expended to implement the gate level design. Simulation must then be
performed at the gate level to address timing problems. Using an IKOS system, a
designer may iteratively simulate at the behavioral level and the gate level
under a consistent framework and intuitive user interface to ensure that the
design is correct. In addition, IKOS products provide for mixed-level simulation
or the ability to perform behavioral level simulation in tandem with gate level
simulation. Mixed-level simulation allows an IC designer to extract newly
developed gate level details from the behavioral level design and simultaneously
simulate at both levels of abstraction, thereby reducing the time to simulate
and verify a complex IC design.
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IKOS designs and markets systems which include software and hardware based
simulation algorithms. The hardware algorithm is implemented in a proprietary
processor used to form a massively parallel simulation engine. The IKOS
simulation systems reduce the time-consuming process of simulation of an IC
design, thereby potentially improving time-to-market of the final product and
the productivity of the IC designer. The software components of the IKOS
simulation systems run on Sun Microsystems, Inc. and Hewlett-Packard Company
workstations.
MAINTENANCE AND SUPPORT
The Company provides hardware and software maintenance and support on a
contractual basis after the initial product warranty has expired. Annual
maintenance revenues approximate 12% of the purchase price. Hardware
maintenance is provided on an on-site or on a return and repair basis. The
Company also provides application support via a toll-free telephone line.
Customers with software maintenance coverage also receive software releases, if
any, from the Company. Foreign distributors generally provide customer
training, service and support for the products they sell. For the three years
ended September 30, 1995, maintenance revenues, as a percent of total revenues,
represented 17% in 1995, 17% in 1994 and 22% in 1993. The decrease in
percentage of maintenance from 1993 to 1994 was a result of the shift in the
customer base to the new series of products. Maintenance as a percentage of
total revenues for fiscal years 1995 and 1994 were similar as the rate of growth
for both product revenues and maintenance revenues were comparable.
COMPETITION
The EDA industry is highly competitive and rapidly changing. The Company's
products are specifically targeted at the emerging portion of the industry
relating to complex designs that the Company believes benefit from hardware-
assisted simulation. To date, substantially all of the Company's revenue has
resulted from sales to this segment of the market. The Company currently
experiences competition from hardware-assisted simulation-based systems sold by
Zycad and traditional software verification methodologies from vendors, such as
Mentor Graphics, Cadence, Viewlogic and Synopsis. As a result of the lack of
general familiarity by potential users of hardware-assisted simulation systems,
the Company must educate potential customers with respect to the benefits of
hardware-assisted simulation in order for such customers to consider the
Company's systems for use within their EDA design process. The Company expects
competition in the market for verification tools at all levels of simulation to
increase as other companies attempt to introduce new products and product
enhancements. Moreover, the Company competes, and expects that it will continue
to compete, with established EDA companies. A number of these companies have
longer operating histories, significantly greater financial, technical and
marketing resources, greater name recognition and larger installed customer
bases than the Company. In addition, many of these competitors and potential
competitors have established relationships with current and potential customers
of the Company and offer a broader and more comprehensive product line.
Increased competition could result in price reductions, reduced margins and loss
of market share, all of which could materially adversely affect the Company. In
addition, current competitors or other entities may develop other products that
have significant advantages over the Company's products. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its operating results.
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The Company competes on the basis of certain factors, including product
performance, price, support of industry standards, technical support and
customer service, timely introduction of new products, ease of use and
reputation. The Company believes that it currently competes favorably overall
with respect to these factors, particularly, product performance including the
ability of customers to reduce design time or iterations, and technical support
and customer service.
CUSTOMERS, MARKETING AND SALES
IKOS sells its products to a broad range of companies including those in the
communications, semiconductor, multimedia/graphics, computer, aerospace and
consumer electronics industries. The Company markets its products and services
primarily through its direct sales and service organization. The Company employs
a technically-oriented sales force and application engineering team to serve the
needs of existing and prospective customers. IKOS' direct sales strategy
concentrates on those companies that it believes are key users and designers of
ICs and IC-based systems for high-performance applications. For the fiscal year
ended September 30, 1995, one distributor, Itochu & Co., Ltd. (Itochu) in Japan
accounted for approximately 15% of net revenues. In fiscal 1994, one customer,
Motorola, Inc., and one distributor, Itochu, accounted for approximately 18% and
10% of net revenues, respectively. In fiscal 1993, no customer accounted for
more than 10% of net revenues.
Direct Sales. IKOS currently maintains direct sales and support offices in the
following states: Arizona, California, Minnesota, New Hampshire, New Jersey and
Texas. IKOS makes direct sales internationally in Canada, in Japan through its
wholly-owned subsidiary and in central Europe through its wholly-owned
subsidiary, ICOS Systems GmbH, and through its sales offices in France and
England. Direct sales, including sales in Canada and maintenance fees,
accounted for 79% of the Company's net revenues in fiscal 1995.
Distributors. IKOS believes that international markets are an important source
of the Company's revenues. Accordingly, the Company has developed distributor
relationships in ten foreign countries in Europe and Asia. Sales to a variety
of customers in Japan, through the Company's exclusive Japanese distributor,
Itochu & Co., Ltd., constituted approximately 15% of total sales for fiscal
1995.
International Sales. International sales, excluding Canada accounted for
approximately 37%, 26% and 20% of the Company's net revenues in fiscal 1995,
1994 and 1993, respectively. Sales to a variety of customers in Japan, through
the Company's exclusive Japanese distributor, Itochu & Co., Ltd., constituted
approximately 15% of total sales for fiscal 1995. The Company's current
agreement with Itochu provides for discounts to Itochu that are similar to those
offered by the Company to its other foreign distributors. Sales in all foreign
countries are denominated in U.S. dollars. Although the Company has attempted to
reduce the risk of fluctuations in exchange rates associated with international
revenues by selling its systems for United States currency only, the Company
pays the expenses of its international operations in local currencies and does
not engage in hedging transactions with respect to such obligations. Currency
exchange fluctuations in countries in which the Company sells its systems could
have a material adverse effect on the Company by resulting in pricing that is
not competitive with prices denominated in local currencies.
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Conducting business in international markets requires compliance with applicable
laws and regulations, such as safety and telecommunication laws and regulations
of foreign jurisdictions and import duties and quotas. To date, the Company has
not experienced any difficulty in obtaining export licenses from the U.S.
Department of Commerce for foreign sales; however, there can be no assurance
that the Company will not experience difficulties in the future.
MANUFACTURING AND SUPPLIERS
The Company performs final assembly and test of all its products in its
Cupertino, California facility. The Company utilizes third parties for all major
subassembly manufacturing, including printed circuit boards and custom ICs. The
Company has a testing and qualification program to ensure that all subassemblies
meet the Company's specifications before going into final assembly and test.
The capacity and speed of IKOS' hardware results from its basic design and
architecture, rather than from custom components or components that are required
to perform near technological limits. Therefore, IKOS is able to assemble the
hardware from components that are based on standard technologies. Certain of
these components, including gate arrays and power supplies, are each available
only from a single source. The Company believes that it could obtain
alternative sources in a short period of time, although the interruption in the
Company's supply of such components could have a material adverse effect on its
business in the short term. The Company endeavors to maintain an ample supply
of such components at all times through order generation based on tracking of
sales projections, production and inventories, and by ordering critical
components for delivery over an extended period.
PRODUCT DEVELOPMENT
The Company's ongoing product development activities include the enhancement of
current products, such as the ability to simulate and verify the design of
higher gate count ICs and to offer a greater degree of integration with EDA
tools. Furthermore these product development activities include the development
of new product options and features, such as new library tools and the research
and development of new technologies for use in future products.
The Company's research and product development organization included 31
engineers at September 30, 1995 of whom 25 were engaged principally in software
development. During fiscal 1995, 1994 and 1993, the Company spent approximately
$4.0 million, $3.9 million and $7.9 million, respectively, on research and
development. Included in the 1993 amount is approximately $3.6 million of
expenses related to the amended joint development agreement with Racal-Redac and
about $600,000 of non-recurring engineering expenses related to the fabrication
of prototype ASICs developed for the Company's Nsim simulator. The Company's
research and development costs, including costs of software development before
technological feasibility, are expensed as incurred.
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PATENTS AND TRADEMARKS
Due to the rapid pace of technological advancement, the Company believes it is
less dependent on the protection of proprietary product information than on its
ability to develop and market new products. The Company protects its
proprietary product information through the use of employee nondisclosure
agreements and by limiting access to confidential information. The Company
presently has three United States patents, two of which expire on November 22,
2005, and the third expiring on June 30, 2009, that cover various aspects and
features of its products, including its overall system architecture and certain
features in the hardware. Although the Company may file additional patent
applications in the future, it does not expect to rely extensively on patents to
protect its products.
The Company also relies on certain software which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's systems to perform key functions.
The Company's tradename, "IKOS," its facing parrots logo and its product series
named "Voyager" are registered trademarks of the Company.
EMPLOYEES
As of September 30, 1995 the Company employed a total of 130 persons, consisting
of 77 in marketing, sales and support, 9 in manufacturing, 31 in research,
development and engineering, and 13 in finance, administration and other
capacities. The Company has never had a work stoppage. None of its employees is
represented by a labor organization, and the Company considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal
manufacturing, marketing, research and development, and engineering facility,
are located in approximately 57,000 square feet of leased office building space
in Cupertino, California. The lease on this facility expires September 2000,
with options to extend the lease for up to nine years. The Company subleases
9,000 square feet of its leased office building space in Cupertino, California.
In addition, the Company leases sales office space domestically in Arizona,
California, Minnesota, New Hampshire, New Jersey and Texas and internationally
in England, France, Germany and Japan. The Company believes that its existing
facilities are adequate for its current needs and that additional space will be
available as needed.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the Nasdaq National Market
under the symbol IKOS. From March 1994 to May 1995, the Company's stock was
traded on The Nasdaq SmallCap Market. The following table sets forth, for the
fiscal period indicated, the high and low closing sales prices for the Common
Stock as reported by Nasdaq. The quotations for the Common Stock traded on The
Nasdaq SmallCap Market may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL 1994
First Quarter........................ 5.125 2.875
Second Quarter....................... 5.000 3.125
Third Quarter........................ 3.750 2.625
Fourth Quarter....................... 4.250 2.625
FISCAL 1995
First Quarter........................ 5.125 3.250
Second Quarter....................... 6.500 4.500
Third Quarter........................ 10.125 4.750
Fourth Quarter....................... 13.625 8.875
</TABLE>
The approximate number of record holders of IKOS stock as of November 15, 1995
was 200. The approximate number of beneficial holders is estimated to be 3,700
as of that same date.
Through fiscal 1992, the Company repurchased 241,150 shares. No shares have been
repurchased since fiscal 1992 and the Company does not intend to repurchase
additional shares at this time.
The Company has never declared or paid cash dividends on its stock. The Company
currently anticipates that it will retain all future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------------------
Sept. 30, Oct. 1, Oct. 2, Sept. 26, Sept. 28,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net revenues $28,600 $21,636 $ 16,528 $ 13,942 $ 15,122
Cost of revenues 7,139 5,930 6,331 3,993 3,786
----------- -------- --------- ---------- ------------
Gross profit 21,461 15,706 10,197 9,949 11,336
Operating expenses:
Research and development 3,999 3,861 7,896 2,627 5,751
Sales and marketing 11,763 9,447 9,303 8,879 8,920
General and administration 2,301 1,596 1,873 1,807 1,570
----------- -------- --------- ---------- ------------
Total operating expenses 18,063 14,904 19,072 13,313 16,241
----------- -------- --------- ---------- ------------
Income (loss) from operations 3,398 802 (8,875) (3,364) (4,905)
Other income (expense):
Interest income 159 69 130 329 784
Interest expense (107) (75) -- -- --
Other 117 140 48 -- --
----------- -------- --------- ---------- ------------
Total other income 169 134 178 329 784
----------- -------- --------- ---------- ------------
Income (loss) before provision for
income taxes and extraordinary credit 3,567 936 (8,697) (3,035) (4,121)
Provision for income taxes 411 95 53 72 58
----------- -------- --------- ---------- ------------
Income (loss) before extraordinary credit 3,156 841 (8,750) (3,107) (4,179)
Extraordinary credit - forgiveness of debt -- 664 -- -- --
----------- -------- --------- ---------- ------------
Net income (loss) $ 3,156 $ 1,505 ($8,750) ($3,107) ($4,179)
=========== ======== ========= ========== ============
Earnings (loss) per share:
Income (loss) before extraordinary credit $0.51 $0.15 ($1.62) ($0.58) ($0.79)
Extraordinary credit -- 0.12 -- -- --
----------- -------- --------- ---------- ------------
Net income (loss) $0.51 $0.27 ($1.62) ($0.58) ($0.79)
=========== ======== ========= ========== ============
Common and common equivalent shares used
in computing per share amounts 6,151 5,651 5,415 5,379 5,273
=========== ======== ========= ========== ============
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 7,509 $ 3,850 $ 1,805 $ 6,830 $ 10,397
Total assets 17,152 12,129 10,806 15,678 17,732
Long-term, debt, less current portion 1,300 2,151 2,779 344 504
Total stockholders' equity 7,710 3,476 1,903 10,603 13,645
</TABLE>
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NET REVENUES
Net revenues increased 32% to $28,600,000 for the fiscal year ended September
30, 1995 as compared to $21,636,000 for fiscal 1994. The primary reason for the
increase was continued growth in sales of Voyager systems and the introduction
of new Gemini systems in the fourth quarter. These product lines contributed
the vast majority of product net revenues for the year. Maintenance revenue was
$4,887,000 and $3,750,000 for the fiscal years 1995 and 1994, respectively,
representing 17% and 17% of net revenues. The increase in maintenance revenue
is a result of the continued acceptance of the new products by the growing
customer base. International revenues increased by 89% and domestic revenues
increased by 12% over this same period.
Net revenues for fiscal 1994 were $21,636,000 as compared to net revenues in
fiscal 1993 of $16,528,000. This 31% increase was the result of the broader
acceptance of the Voyager systems, partially offset by a decrease in revenues
from aging products.
International sales (export sales and sales shipped by the Company's European
operation) were $10,560,000, $5,583,000 and $3,330,000 for the fiscal years
1995, 1994 and 1993, respectively. These sales represents 37%, 26% and 20% of
net revenues. The increases in international sales is a result of the increased
customer acceptance of the new product offerings, increased economic demand,
particularly in Europe, increased focus on the international market and
increased presence in the Far East marketplace as the Company opened its
subsidiary in Japan during fiscal 1995. It is expected that international
revenues should increase as a percentage of revenues in fiscal 1996.
The Company believes that revenues may increase in fiscal 1996, as the Company
continues to upgrade and add to its current product offerings. The Company also
anticipates continued growth in maintenance revenues. The Company first
released its Voyager Series product, the VHDL software simulator (VS) in 1992
and has since released its mixed level simulator, its next generation hardware
accelerator and its software gate level simulator. The Company entered the
Verilog market with its Gemini product during 1995 and has recently released its
Voyager fault simulator (Voyager FS). Although the Company believes its product
offering has been accepted very favorably, there can be no assurances that there
will not be any new products offerings by competitors or changes in the
marketplace that could adversely affect the Company's sales and profits.
GROSS PROFITS
Gross profit was $21,461,000, $15,706,000 and $10,197,000 or 75%, 73% and 62%
of total net revenues for fiscal years 1995, 1994 and 1993, respectively. The
increases in gross margin were primarily the result of a change in product mix
to a greater percentage of the newer product offerings which have higher
margins. The Voyager products and the new Gemini products have a much higher
content of software which contributes to the higher margins. In addition to
the product mix but to a lesser extent, the absorption of fixed manufacturing
costs over a broader
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revenue base also contributed to higher overall margins. The Company believes
margins may improve slightly in fiscal 1996 as the Company believes it will
continue to recognize increased manufacturing efficiencies and continued sales
of products with higher margins.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $3,999,000, $3,861,000 and $7,896,000 for
fiscal 1995, 1994 and 1993, respectively. As a percent of net revenues,
research and development expenses were 14%, 18% and 48% for fiscal 1994, 1993
and 1992, respectively, as the Company had completed a build-up in staffing and
expenses to effect its major product development program that began in fiscal
1991. Research and development expenses in fiscal 1993 were substantially higher
than both fiscal 1994 and 1995 because of a $3.6 million charge to research and
development resulting from in process research and development acquired under
the amended joint development agreement with Racal. In addition, the Company
incurred a non-recurring engineering expense of approximately $600,000 in
connection with the development of its Nsim simulator. Research and development
expenses are expected to increase both in absolute dollars and as a percentage
of revenues as the Company pursues product enhancement, new product development
and technology development programs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $11,763,000, $9,447,000 and $9,303,000 in
fiscal 1995, 1994 and 1993 or 41%, 44% and 56% of net revenues, respectively.
The primary cause of the increase in absolute dollars has been an increase in
the amount of presale support and benchmarking performed by field application
engineers and increased commission expenses. Spending has increased in the
foreign sales offices to support the increased activity in both Europe and Asia.
Sales and marketing expenses are expected to increase in absolute dollars in
fiscal 1996 but decrease as a percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2,301,000, $1,596,000 and 1,873,000
for fiscal 1995, 1994 and 1993, or 8%, 7% and 11% of net revenues, respectively.
This increase in 1995 was primarily due to additional headcount, as the Company
filled the President and Chief Operating Officer positions which were vacant in
fiscal 1994. This vacancy is the primary reason for the decrease in expenses
from fiscal 1993 to fiscal 1994. General and administrative expenses are
expected to increase in absolute dollars in fiscal 1996 but decrease slightly as
a percentage of revenues.
OTHER INCOME (EXPENSE)
Net interest income in fiscal 1995 of $52,000 was the result of interest income
of $159,000 being earned on an increasing cash, cash equivalent and short-term
investments during the year, net of interest paid on long-term debt borrowings
of $107,000. Net interest expense in fiscal 1994 was the result of $75,000 of
interest expense on the long-term debt. Net interest income of $130,000 for
fiscal 1993 represents interest income earned on cash, cash equivalents and
short-term investments with no related interest expense. Other income in fiscal
1995, 1994 and 1993 was $117,000, $140,000 and $48,000, respectively and
primarily relates to rental income from
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property that the Company began leasing in 1993. Interest income is expected to
increase in both absolute dollars and as a percentage of revenues, as the cash,
cash equivalents and short-term investment balances are expected to grow with a
decreasing offset of interest expense as the long-term debt is repaid.
PROVISION FOR INCOME TAXES
The Company's tax provision for fiscal 1995, 1994 and 1993 consists primarily of
federal alternative minimum tax, state taxes and foreign withholding taxes. As
of September 30, 1995, the Company had federal and state net operating loss
carryforwards of approximately $10,000,000 and $400,000 respectively. The
Company also had federal and California research and development tax credit
carryforwards of approximately $1.0 million and $300,000 respectively. The net
operating loss and credit carryforwards will expire at various dates beginning
in 1997 through 2009, if not utilized.
Under Statement of Financial Accounting Standards No. 109 (FAS 109), deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company has provided a full valuation allowance
against its net deferred tax assets due to uncertainties surrounding their
realization, primarily due to the Company having cumulative losses in the last
three years, which causes predictability of earnings in the early future years
to be uncertain.
EXTRAORDINARY CREDIT - FORGIVENESS OF DEBT
In April 1994, the Company and Racal re-negotiated the terms of the July 1, 1993
agreement regarding the transfer, joint development and joint ownership in
certain Racal technology. The new terms reduce overall payments to Racal from
IKOS by $750,000 and extend the scheduled payments into fiscal 1998. This
resulted in an extraordinary credit of $664,000 after being offset by certain
related expenses.
OTHER
The Company has experienced virtually no gains or losses on foreign currency
translation since substantially all of its international sales to date have been
billed and collected in U.S. dollars. The Company pays the expenses of its
international operations in local currencies and does not engage in hedging
transactions with respect to such obligations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations, including increases in
accounts receivable and inventory and capital equipment acquisitions, primarily
through private and public sales of equity securities and a loan secured by
capital equipment. During fiscal 1995 the Company's cash, cash equivalents and
short-term investments increased to $7,755,000 from $3,982,000 in fiscal 1994.
The increase was a result of $4,502,000 cash provided by operating activities
and $324,000 provided by financing activities offset by $943,000 for investment
activities.
12
<PAGE>
Operating Activities - The Company's operating activities provided cash of
$4,502,000 during fiscal 1995, $1,398,000 in fiscal 1994 and used cash of
$686,000 in fiscal 1993. For fiscal 1995 and 1994, net cash provided by
operating activities resulted primarily from net income adjusted for
depreciation and amortization, which was partially offset by increases in
accounts receivable, inventories and accounts payable associated with increases
in revenue activity. In fiscal 1993, the net cash used in operating activities
was primarily the result of net losses.
Investing Activities - Other than the purchase and sale of short-term
investments, investment activities were comprised primarily of capital
expenditures of $1,053,000, $959,000, $1,037,000 for fiscal 1995, 1994 and 1993,
respectively. Capital expenditures were primarily for evaluation equipment,
engineering workstations and the Company's own hardware simulators which were
used for research and development and benchmarking purposes.
The Company capitalized no software costs in fiscal 1995 and 1994, as such
capitalizable costs were insignificant and thus charged to research and
development expenses for the respective periods. The Company capitalized
software costs of $513,000 in fiscal 1993 for the development of the VHDL
simulator and other Voyager series products.
Financing Activities - During fiscal 1995, 1994 and 1993, the Company received
cash of $1,078,000, $68,000 and $50,000, respectively, upon the exercise of
options to purchase Common Stock. During these same periods, the Company's
principal payments on long-term borrowings were $754,000, $683,000 and $335,000,
respectively.
The Company's primary unused sources of funds at September 30, 1995 consisted of
$7,305,000 of cash and cash equivalents, in addition to $450,000 of short-term
investments. In October 1995, the Company sold 1,150,000 shares of common
stock in a public offering resulting in net proceeds to the Company of
approximately $10,500,000.
The Company expects to make capital expenditures throughout fiscal 1996. The
Company expects that capital expenditures to increase as compared to capital
expenditures incurred in fiscal 1995. The Company believes that net proceeds
from the recently completed public offering, together with cash and cash
generated from operations, will be sufficient to finance its operations through
at least the end of fiscal 1996. To the extent necessary, the Company may also
use bank borrowings and capital leases depending on the terms available. The
Company's cash requirements in the future may also be financed through
additional equity or debt financing. There can be no assurance that such
financing can be obtained on favorable terms, if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and Schedules, and the report of the
independent auditors appear on pages F-1 through F-13 and S-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position With the Company
- ---- --- -------------------------
<S> <C> <C>
Gerald S. Casilli......... 56 Chairman of the Board
Ramon A. Nunez............ 41 Chief Executive Officer, President
and Director
William B. Fazakerly...... 47 Chief Technical Officer
Joseph W. Rockom.......... 56 Chief Financial Officer, Vice President of
Finance and Administration, and Secretary
Paul Offredi.............. 50 Senior Vice President, Product Operations
Daniel R. Hafeman......... 46 Vice President of Engineering
Stephen M. McLaughlin..... 48 Vice President of Manufacturing
Lawrence A. Melling....... 38 Vice President of Marketing
John Stressing............ 51 Vice President of Worldwide Sales
Lutz P. Henckels (1)...... 55 Director
James R. Oyler (1)........ 49 Director
Glenn E. Penisten (1)..... 64 Director
</TABLE>
(1) Member of the Audit Committee
Mr. Casilli has served as Chairman of the Board of Directors of the Company
since July 1989 and served as Chief Executive Officer from April 1989 to August
1995. He has served as a director since 1986. From January 1986 to December 1989
he was a general partner of Trinity Ventures, Ltd., a venture capital firm that
was a former investor in the Company. Mr. Casilli was a general partner of
Genesis Capital, a venture capital firm, from February 1982 to 1990. Mr. Casilli
founded Millennium Systems, a manufacturer of microprocessor development
systems, in 1973 and served as its President and Chief Executive Officer until
1982.
Mr. Nunez was appointed Chief Executive Officer in August 1995. Mr. Nunez had
been President, Chief Operating Officer and Director of the Company since
October 1994. He had served as Vice President of Worldwide Sales since July
1993. Mr. Nunez joined the Company in April 1990 as Vice President of North
American Sales after five years in sales management with Zycad Corporation.
Earlier he was branch sales manager for Cadnetix (now part of Intergraph) in
Southern California.
14
<PAGE>
Mr. Fazakerly, a founder of the Company, has served as Chief Technical Officer
since June 1991. From August 1989 to June 1991 he served as President and Chief
Operating Officer and from November 1984 to August 1989 he served as Vice
President of Engineering. He also served as Vice President of Marketing and
Sales from May 1989 to October 1989. From May 1983 to October 1984, Mr.
Fazakerly was a consultant to semiconductor and systems companies, including
National Semiconductor Corporation, Adaptec, Inc., Monolithic Memories, Inc.,
Fairchild Semiconductor, and Scientific Micro Systems, Inc. He served as Vice
President of Engineering of Scientific Micro Systems, Inc. from 1976 to 1982.
Mr. Rockom has served as Chief Financial Officer and Vice President of Finance
and Administration since September 1986. Mr. Rockom has also served as the
Company's Secretary since April 1995. Before joining the Company, Mr. Rockom
spent seventeen years at American Microsystems, Inc. (AMI), a semiconductor
manufacturer, where he held a variety of administrative, operating and
management positions, including Vice President of Finance.
Mr. Offredi was appointed Senior Vice President of Product Operations in August
1995. From August 1992, Mr. Offredi provided management consulting to companies
in computer related fields. From 1991 until 1992 Mr. Offredi was the General
Manager of EDA West for Teradyne, a manufacture of electronic test equipment.
From 1987 until 1991 Mr. Offredi was the Senior Vice President of Operations for
Zycad Corporation.
Mr. Hafeman, a founder of the Company, has served as Vice President of
Engineering since August 1989. From December 1984 to August 1989 he served in
various positions of engineering management with the Company. Mr. Hafeman was an
engineering manager at Scientific Micro Systems, Inc. for eight years prior to
his employment with the Company.
Mr. McLaughlin has served as Vice President of Manufacturing since November
1986. From July 1977 to November 1986, he served as Director of Manufacturing of
Scientific Micro Systems, Inc.
Mr. Melling has served as Vice President of Marketing since July 1993. From
August 1990 to July 1993, Mr. Melling was Vice President of Technical Support.
From 1983 until joining IKOS in 1985, Mr. Melling had been a system design
engineer at Corvus Systems, a manufacturer of computer networking equipment.
Prior to his relationship with Corvus Systems, he was a production and circuit
engineer with Hewlett-Packard for four years.
Mr. Stressing has served as Vice President of Worldwide Sales since August 1995.
From October 1993 to August 1995 he served as European Sales Director and Vice
President, International Sales. From January 1989 to November 1993 he was the
proprietor of Premier Consultants, a recruitment and sales agency for IKOS'
products in Scandinavia. Prior to founding Premier Consultants, Mr. Stressing
was employed in various sales capacities by Zycad Corporation for four years, by
Daisy Systems for one year, by Teradyne for four years, and by British Aerospace
for thirteen years.
15
<PAGE>
Mr. Henckels has served as a member of the Board since February 1994. Mr.
Henckels has been President of LeCroy Corporation, a supplier of test and
measurement equipment, since 1993 and Chief Executive Officer since 1994. Mr.
Henckels is also a director of LeCroy Corporation. Before joining LeCroy
Corporation he was President of U.S. Operations for Racal-Redac, Inc. from 1989
to 1993. From 1983 to 1989 Mr. Henckels was President and Founder of HHB
Systems, an EDA company. Before that he was President and founder of HHB
Softron, an engineering consulting firm.
Mr. Oyler has served as a member of the Board since October 1991. He is
presently President, Chief Executive Officer and Director of Evans & Sutherland
Computer Corporation. Evans & Sutherland develops, manufactures and markets high
performance systems for various applications with demanding graphics
requirements. Prior to his position with Evans and Sutherland, Mr. Oyler was
president of AMG, Inc., a process machine design company. From 1976 to 1990 Mr.
Oyler worked at Harris Corporation, most recently as Senior Vice President and
Sector Executive, where he was responsible for nine operating divisions. Prior
to that he held positions as consultant and associate with Booz, Allen &
Hamilton in New York, a consulting company.
Mr. Penisten has been a member of the Board of Directors since September 1985.
Since September 1985 he has been a general partner of Alpha Partners, a venture
capital firm and former investor in the Company. From January 1985 to August
1985, he was a general partner of P & C Venture Partners, a venture capital
firm. From 1982 to 1985, he was a Senior Vice President at Gould/AMI. From 1976
to 1982, Mr. Penisten served as Chief Executive Officer of AMI, a semiconductor
manufacturer. Mr. Penisten is also a director of Bell Micro-Products, Inc. and
Pinnacle Systems, Inc.
All directors hold office until the next annual meeting of stock holders or the
election and qualification of their successors. The Board of Directors elects
officers annually and such officers serve at the discretion of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
section captioned "EXECUTIVE COMPENSATION AND OTHER MATTERS contained in the
Company's Definitive Proxy Statement related to the Annual Meeting of
Stockholders to be held February 8,, 1996, to be filed by the Company with the
Securities and Exchange Commission (the "Proxy Statement").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "GENERAL INFORMATION- Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements of the Registrant are filed as
part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................................... F - 1
Consolidated Balance Sheets, September 30, 1995 and
October 1, 1994.......................................................................... F - 2
Consolidated Statements of Operations for the fiscal years ended
September 30, 1995, October 1, 1994 and October 2, 1993.................................. F - 3
Consolidated Statements of Stockholders' Equity for the fiscal years ended
September 30, 1995, October 1, 1994 and October 2, 1993.................................. F - 4
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 1995, October 1, 1994 and October 2, 1993.................................. F - 5
Notes to Consolidated Financial Statements................................................ F - 6
</TABLE>
(a)(2) Financial Statement Schedule
The following financial statement schedule of the Registrant
are filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule I -- Valuation and Qualifying Accounts........................................... S - 1
</TABLE>
All other schedules are omitted because they are not
applicable or the required information is shown in the
Financial Statements or notes thereto.
(a)(3) Exhibits
See Index to Exhibits beginning on Page 19 of this report.
(b) The Company filed no reports on Form 8-K during the fourth
quarter ended September 30, 1995.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IKOS Systems, Inc.
/s/ Ramon Nunez
-----------------------------------
Ramon Nunez, Chief Executive
Officer, President and Director
Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed on behalf of the Registrant and in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/s/ Ramon Nunez Chief Executive Officer, President December 15, 1995
- ------------------------------
(Ramon Nunez) and Director
/s/ Gerald S. Casilli Chairman of the Board December 15, 1995
- ------------------------------
(Gerald S. Casilli)
/s/ Joseph W. Rockom Vice President of Finance and December 15, 1995
- ------------------------------
(Joseph W. Rockom) Administration and Chief Finance
Officer (Principal Accounting and
Financial Officer) and Secretary
/s/ Lutz Henckels Director December 15, 1995
- ------------------------------
(Lutz Henckels)
/s/ James R. Oyler Director December 15, 1995
- ------------------------------
(James R. Oyler)
/s/ Glenn E. Penisten Director December 15, 1995
- ------------------------------
(Glenn E. Penisten)
</TABLE>
18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
IKOS Systems, Inc.
We have audited the accompanying consolidated balance sheets of IKOS Systems,
Inc. as of September 30, 1995 and October 1, 1994 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IKOS
Systems, Inc. at September 30, 1995 and October 1, 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
San Jose, California
October 17, 1995
F-1
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCED SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, October 1,
1995 1994
------------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 7,305 $ 3,422
Short-term investments................................................... 450 560
Accounts receivable (net of allowances for
doubtful accounts of $171 and $122, respectively)...................... 6,046 4,884
Inventories.............................................................. 1,328 1,050
Prepaid expenses and other assets........................................ 271 222
------------- -----------
Total current assets............................................ 15,400 10,138
Equipment and leasehold improvements
Office and evaluation equipment........................................ 2,730 2,576
Machinery and equipment................................................ 4,985 4,664
Leasehold improvements................................................. 287 267
------------- -----------
8,002 7,507
Less allowances for depreciation and amortization............... (6,363) (5,859)
------------- -----------
1,639 1,648
Other assets............................................................. 113 343
------------- -----------
$ 17,152 $ 12,129
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 1,613 $ 1,909
Accrued payroll and related expenses..................................... 1,195 786
Accrued commissions...................................................... 697 650
Income taxes payable..................................................... 188 13
Other accrued liabilities................................................ 480 360
Deferred maintenance revenues............................................ 3,030 1,979
Current portion of long-term debt........................................ 688 591
------------- -----------
Total current liabilities....................................... 7,891 6,288
Long-term debt, less current portion........................................ 1,300 2,151
Accrued rent................................................................ 251 214
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares
authorized, none issued and outstanding................................ -- --
Common stock, $.01 par value; 25,000 shares
authorized, 5,886 and 5,504 shares
issued and outstanding, respectively................................... 59 55
Additional paid-in capital............................................... 27,034 25,960
Accumulated deficit...................................................... (19,383) (22,539)
------------- -----------
Total stockholders' equity...................................... 7,710 3,476
------------- -----------
$ 17,152 $ 12,129
============= ===========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------
September 30, October 1, October 2,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net revenues
Product................................................. $23,713 $17,886 $ 12,917
Maintenance.......................................... 4,887 3,750 3,611
------------ ---------- ----------
Total net revenues................................... 28,600 21,636 16,528
Cost of revenues
Product............................................. 5,982 5,000 5,542
Maintenance............................................ 1,157 930 789
------------ ---------- ----------
Total cost of revenues............................. 7,139 5,930 6,331
------------ ---------- ----------
Gross profit......................................... 21,461 15,706 10,197
Operating expenses:
Research and development......................... 3,999 3,861 7,896
Sales and marketing.................................. 11,763 9,447 9,303
General and administration......................... 2,301 1,596 1,873
------------ ---------- ----------
Total operating expenses.......................... 18,063 14,904 19,072
------------ ---------- ----------
Income (loss) from operations........................ 3,398 802 (8,875)
Other income (expense):
Interest income.................................... 159 69 130
Interest expense.................................... (107) (75) --
Other............................................. 117 140 48
------------ ---------- ----------
Total other income............................... 169 134 178
------------ ---------- ----------
Income (loss) before provision for
income taxes and extraordinary credit............. 3,567 936 (8,697)
Provision for income taxes.......................... 411 95 53
------------ ---------- ----------
Income (loss) before extraordinary credit............ 3,156 841 (8,750)
Extraordinary credit - forgiveness of debt......... -- 664 --
------------ ---------- ----------
Net income (loss)................................. $ 3,156 $ 1,505 ($8,750)
============ ========== ==========
Earnings (loss) per share:
Income (loss) before extraordinary credit.......... $0.51 $0.15 ($1.62)
Extraordinary credit............................ -- 0.12 --
------------ ---------- ----------
Net income (loss).................................. $0.51 $0.27 ($1.62)
============ ========== ==========
Common and common equivalent shares used
in computing per share amounts................... 6,151 5,651 5,415
============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STARTEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Stockholders' Total
Common Stock Paid-in Accumulated Notes Stockholders'
-------------------
Shares Amount Capital Deficit Receivable Equity
-------- -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 26, 1992.......... 5,405 $54 $25,851 ($ 15,294) $(8) $10,603
Net issuance of stock under
employee benefit plans.............. 26 -- 42 -- -- 42
Payments on stockholder's note
receivable.......................... -- -- -- -- 8 8
Net loss............................... -- -- -- (8,750) -- (8,750)
-------- -------- ---------- ----------- ------------- -------------
Balance at October 2, 1993............. 5,431 54 25,893 (24,044) -- 1,903
Net issuance of stock under
employee benefit plans.............. 73 1 67 -- -- 68
Net income............................. -- -- -- 1,505 -- 1,505
-------- -------- ---------- ----------- ------------- -------------
Balance at October 1, 1994............. 5,504 55 25,960 (22,539) -- 3,476
Net issuance of stock under
employee benefit plans.............. 382 4 1,074 -- -- 1,078
Net income............................. -- -- -- 3,156 -- 3,156
-------- -------- ---------- ----------- ------------- -------------
Balance at September 30, 1995......... 5,886 $59 $27,034 ($ 19,383) -- $ 7,710
======== ======== ========== =========== ============= =============
</TABLE>
See note to consolidated financial statements
F-4
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS CASH FLOWS
Increase (decrease) in cash and cash equivalents (in thousands)
<TABLE>
<CAPTION>
Fiscal years ended
----------------------------------------------
September 30, October 1, October 2,
1995 1994 1993
--------------- ----------- -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................................. $ 3,156 $ 1,505 ($8,750)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization................................... 1,259 2,024 2,628
Gain (loss) on retirement of equipment.......................... 16 (4) 6
Deferred rent................................................... 37 26 172
License delivery and technology transfer
in exchange for debt.......................................... -- (344) --
Decrease of long-term debt - forgiveness of note.................. -- (750) 3,600
Changes in operating assets and liabilities
Accounts receivable............................................. (1,162) (2,069) 1,756
Inventories..................................................... (234) 415 (506)
Prepaid expenses and other current assets....................... (49) (168) 20
Other assets.................................................... (27) 12 (3)
Accounts payable................................................ (296) (169) 595
Accrued payroll and other expenses.............................. 409 128 80
Accrued commissions............................................. 47 357 (111)
Income taxes payable............................................ 175 4 (6)
Other accrued liabilities....................................... 120 (112) 23
Deferred maintenance revenues................................... 1,051 543 (190)
--------------- ----------- -------------
Net cash provided by (used in) operating activities........... 4,502 1,398 (686)
Investing activities:
Purchases of equipment and leasehold improvements................. (1,053) (959) (1,037)
Capitalized software development costs............................ -- -- (513)
Purchase of short-term investments................................ -- (400) (241)
Sales of short-term investments -- -- 2,852
Maturities of short-term investments.............................. 110 381 46
--------------- ----------- -------------
Net cash provided by (used in) investment activities.......... (943) (978) 1,107
Financing activities:
Principal payments on long-term borrowings........................ (754) (683) (335)
Borrowing under promissory note................................... -- 750 --
Sale of common stock.............................................. 1,078 68 50
--------------- ----------- -------------
Net cash provided by (used in) financing activities........... 324 135 (285)
--------------- ----------- -------------
Increase (decrease) in cash and cash equivalents..................... 3,883 555 136
Cash and cash equivalents at beginning of period..................... 3,422 2,867 2,731
--------------- ----------- -------------
Cash and cash equivalents at end of period........................... $ 7,305 $ 3,422 $ 2,867
=============== =========== =============
Supplemental disclosures of cash flow information:
Cash paid for income taxes......................................... $ 230 $ 91 $ 59
Cash paid for interest............................................. $ 107 $ 75 $ --
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. Nature of operations and summary of significant accounting policies
-------------------------------------------------------------------
Basis of presentation: The accompanying consolidated financial statements
---------------------
include the Company and its wholly owned subsidiaries after elimination of
all significant inter-company accounts and transactions.
On October 20, 1994, the Board of Directors approved a one-for-two reverse
stock split of the outstanding shares of common stock of the Company. The
reverse stock split was effected on April 24, 1995 and has been presented
retroactively within these financial statements.
Fiscal year: The Company is on a 52-53 week year. Accordingly, September
-----------
30, 1995, October 1, 1994 and October 2, 1993 are the fiscal year-ends for
1995, 1994 and 1993, respectively. Fiscal year ended October 2, 1993 was a
53-week fiscal year.
Cash equivalents and short-term investments: All liquid investments with
-------------------------------------------
original maturities of three months or less when purchased are considered
to be cash equivalents. Short-term investments are stated at cost, which
approximates market, and consist primarily of U.S. treasury securities,
commercial paper and other corporate obligations. The Company is exposed to
credit risks in the event of default by the financial institutions or
issuers of investments to the extent of amounts recorded on the balance
sheet.
In May 1993, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. Under the rules, debt securities that
the Company has both positive intent and ability to hold to maturity are
carried at amortized cost. Debt securities that the Company does not have
the positive intent and ability to hold to maturity and all marketable
equity securities are classified as available-for-sale or trading and
carried at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are reported as part of equity while
unrealized holding gains and losses on securities classified as trading are
reported in earnings.
The Company adopted FAS 115 on October 2, 1994 and all debt securities are
classified as held-to-maturity. The adoption of FAS 115 had no material
impact on the Company's financial position or its operating results during
fiscal 1995. The fair values for marketable debt and equity securities are
based on quoted market prices. The fair value of marketable securities is
substantially equal to their carrying value as of September 30, 1995.
At September 30, 1995, all held-to-maturity securities were U.S. corporate
debt securities.
F-6
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. Nature of operations and summary of significant accounting policies
-------------------------------------------------------------------
(continued):
------------
Inventories: Inventories are stated the lower of cost (first-in, first-out
-----------
method) or market. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, October 1,
1995 1994
---- ----
<S> <C> <C>
Raw materials............ $ 347 $ 259
Work-in-process.......... 563 502
Finished goods........... 418 289
------ ------
$1,328 $1,050
====== ======
</TABLE>
Equipment and leasehold improvements: Equipment and leasehold improvements
------------------------------------
are stated at cost and are depreciated or amortized using the straight-line
method over the estimated useful life (generally two to five years) of the
related asset, or in the case of leasehold improvements, the term of the
lease.
Software development costs: The Company capitalizes software development
--------------------------
costs upon achievement of technological feasibility, subject to net
realizable value considerations in accordance with Statement of Financial
Accounting Standards No. 86. The Company has defined technological
feasibility as completion of a working model. Such capitalized costs are
amortized upon product release on a straight-line basis over the estimated
useful life of two years or the ratio of current revenue to the total of
current and anticipated future revenues, whichever is greater. For fiscal
1993, the Company capitalized $513,000, respectively. For fiscal 1995 and
1994, such capitalized costs were insignificant and thus charged to
research and development expenses for the respective periods in the
accompanying financial statements. During the fiscal 1995, 1994 and 1993,
the Company amortized $257,000, $864,000, $662,000, respectively, of
previously capitalized software development costs.
Income taxes: The Company accounts for income taxes in accordance with the
------------
provisions of Financial Accounting Standards Board Statement No. 109 (FAS
109), "Accounting for Income Taxes." Under FAS 109, the liability method
is used in accounting for income taxes.
Revenue recognition: Product revenues, which include licensing and software
-------------------
revenues, are generally recognized on shipment provided that no significant
vendor or post-contract support obligations remain outstanding and
collection of the resulting receivable is deemed probable. Insignificant
vendor and post-support obligations are accrued upon shipment. Revenue
under maintenance contracts is recognized ratably over the term of the
related contract, generally twelve months.
Warranty: The Company warrants products sold to customers for ninety days
--------
from shipment. A provision for the estimated future cost of warranty is
recorded upon shipment.
F-7
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. Nature of operations and summary of significant accounting policies
-------------------------------------------------------------------
(continued):
------------
Net income (loss) per share: Net income (loss) per share is computed using
---------------------------
the weighted average number of shares of common stock and common equivalent
shares, when dilutive, from stock options (using the treasury stock
method).
Reclassifications: Certain items in the fiscal 1994 and 1993 financial
-----------------
statements have been reclassified to conform with the fiscal 1995
presentation.
2. Long-term debt
--------------
<TABLE>
<CAPTION>
September 30, October 1,
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Debt obligation to Racal-Redac, Inc.
payable in sixteen quarterly payments
through 1998............................ $1,550 $2,100
Line of credit arrangement with leasing
company paid over 36 months and bearing
interest at 1.45% per month............. 438 642
------ ------
1,988 2,742
Less current portion.................... (688) (591)
------- -------
Long-term debt............... $1,300 $2,151
====== ======
</TABLE>
Racal-Redac Agreement - In July 1993, the Company and Racal-Redac, Inc.
---------------------
("Racal") amended the May 1991 Technology Transfer and Joint Development
Agreement which provided for the exchange of certain VHDL technologies and
for the joint ownership in certain Racal technology for cash, common stock
and future payments based on future sales. Under the terms of the July
agreement the original agreement was amended to require payments of
$3,600,000 (payable over four years) in lieu of the future payments based
on product sales. In April 1994, the Company and Racal re-negotiated the
terms of the July 1993 agreement. The new terms reduced overall payments to
Racal from the Company by $750,000 and extended the scheduled payments into
fiscal 1998. This resulted in an extraordinary credit of $664,000, after
being offset by certain related expenses. The Company has also granted
Racal a security interest in certain VHDL software developed by the Company
with respect to the promissory note to Racal by the Company. In the event
that the Company defaults in the payment of the promissory note, Racal may
obtain all rights to the software, including access to the source code of
the software.
F-8
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
Equipment Line - In June 1993, the Company entered into a $2,000,000
equipment financing credit agreement with Phoenix Leasing, Incorporated.
The Company drew down $750,000 in March 1994 and at September 30, 1995 had
an outstanding balance of $438,000.
Total payments for all debt over the next three fiscal years are as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Equipment
Racal-Redac Line Total
----------- ---- -----
<S> <C> <C> <C>
1996............................... $ 450 238 $ 688
1997............................... 750 200 950
1998............................... 350 -- 350
------ ---- ------
Total.................... $1,550 $438 $1,988
====== ==== ======
</TABLE>
3. Commitments
-----------
Non cancelable operating leases include building leases which expire in
September 2000. The Company has the option to renew its building lease at
its principal offices for up to an additional nine years, commencing in
September 2000, at the fair market value at the time of renewal. The
Company subleases certain facilities. This sublease expires in 1996.
Sublease rental income was approximately $117,000, $140,000 and $48,000, in
fiscal 1995, 1994 and 1993, respectively. Future minimum rentals from
subleases are approximately $71,000.
Rent expense approximated $901,000, $763,000 and $750,000 in fiscal 1995,
1994 and 1993, respectively.
Future minimum payments under non cancelable operating leases at September
30, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1996........................ $ 599
1997........................ 629
1998........................ 659
1999........................ 694
and thereafter.............. 731
------
Total.................. $3,312
======
</TABLE>
F-9
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
4. Stockholders' equity
--------------------
Stock option plans: In 1988, the Company established a Stock Option Plan
------------------
(the Plan) which provides for the granting of options to employees or
directors to purchase shares of the Company's common stock.
Under this plan, the Board of Directors established the option price, which
represents a price not less than the fair market value on the date of
grant.
<TABLE>
<CAPTION>
Options and Rights Outstanding
(in thousands, except per share data)
-------------------------------------
Number Aggregate Price
of Shares Exercise Price Per Share
--------- -------------- ---------
<S> <C> <C> <C>
Balance at September 26, 1992........ 800 $ 2,314 $ 0.350- 5.250
Granted........................... 282 1,220 3.125- 4.625
Exercised......................... (26) (42) 0.350- 3.875
Forfeitures....................... (160) (548) 0.350- 5.250
----- -------
Balance at October 2, 1993........... 896 2,944 0.350- 5.250
Granted........................... 635 2,296 3.375- 4.750
Exercised......................... (73) (68) 0.350- 4.000
Forfeitures....................... (185) (721) 0.350- 5.000
----- -------
Balance at October 1, 1994 1,273 4,451 0.350- 5.250
Granted........................... 391 2,526 3.500-13.250
Exercised......................... (410) (1,356) 0.350- 6.000
Forfeitures....................... (48) (235) 3.000- 9.250
----- -------
Balance at September 30, 1995........ 1,206 $ 5,386 $0.350-$13.250
===== =======
</TABLE>
Exercisable options were approximately 785,000, 651,000 and 514,000 at
fiscal year end for 1995, 1994 and 1993, respectively. At September 30,
there were approximately 5,000 shares that were exercised and subject to
repurchase.
Vesting provisions with respect to the 1988 Stock Option Plan are
determined by the Board of Directors at the date of grant. Generally,
shares issued pursuant to the Plan vest at 12 1/2% upon an employee's six-
month employment date and ratably thereafter in monthly installments over
three and one-half years.
Included in the table are options to purchase approximately 73,000 shares
of common stock granted outside of the 1988 Stock Plan. These options were
granted to various employees and have rights and vesting provisions which
are the same as those granted pursuant to the plan.
Under the 1988 Stock Option Plan, the Company has reserved 2,143,000 shares
for the granting of options of which approximately 2,050,000 shares were
granted, leaving approximately 93,000 shares available for grant at
September 30, 1995.
The Company has reserved 1,196,000 shares of common stock for future
issuance under the 1988 Stock Option Plan for outstanding options and
options available for grant at September 30, 1995 and 73,000 shares of
common stock for future issuance of shares granted outside of the option
plan.
F-10
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
4. Stockholders' equity (continued)
--------------------------------
The Company's 1995 Directors Stock Option Plan (the "Directors Plan") was
adopted by the Company's Board of Directors in June 1995 and will be
submitted for approval in February 1996. A total of 100,000 shares of
Common Stock has been reserved for issuance under the Directors Plan. At
September 30, 1995, 30,000 shares were granted to Directors under the plan
and are included in the table presented above.
Preferred Stock Purchase Rights Plan: The Company has a Preferred Stock
------------------------------------
Purchase Rights Plan (the "Rights Plan") which provides existing
shareholders with the right to purchase 1/100 preferred share for each
common share held in the event of certain changes in the Company's
ownership. The Rights Plan may serve as a deterrent to takeover tactics
which are not in the best interests of shareholders. The Board of Directors
of the Company has designated 500,000 shares of Series G Preferred Stock,
$0.01 par value per share, and has reserved such shares for issuance
pursuant to the Company's Rights Plan.
5. Income taxes
------------
The tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
September 30, October 1, October 2,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal...................... $ 90 $ 7 $ --
State........................ 112 3 7
Foreign...................... 209 85 46
----- ----- -----
$ 411 $ 95 $ 53
===== ===== =====
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate (35% in 1995 and 1994; 34% in 1993 ) follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
September 30, October 1, October 2,
1995 1994 1993
-------------- ----------- -----------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rate......... $ 1,249 $ 328 $(2,957)
Operating losses (utilized), not utilized.............. (1,170) (328) 2,957
Alternative minimum tax................................ 90 7 --
Foreign withholding tax................................ 130 85 46
State taxes............................................ 112 3 7
------- ----- -------
$ 411 $ 95 $ 53
======= ===== =======
</TABLE>
As of September 30, 1995, the Company had federal and state net operating
loss carryforwards of approximately $10,000,000 and $400,000, respectively.
The Company also had federal and California research and development tax
credit carryforwards of approximately $1,000,000 and $300,000,
respectively. The net operating loss and credit carryforwards will expire
at various dates beginning in 1997 through 2009, if not utilized.
F-11
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
5. Income taxes (continued)
------------------------
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation could result in the expiration of net operating
losses and credits before utilization.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of September 30, 1995 and October 1,
1994, are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, October 1,
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......... $ 3,500 $ 5,000
Research credits......................... 1,200 1,200
Capitalized software..................... 1,600 2,800
Deferred revenue......................... 1,200 733
Accrued expenses and reserves............ 700 (233)
------- -------
Total deferred tax assets.............. 8,200 9,500
Valuation allowance for deferred tax
assets................................ (8,200) (9,500)
------- -------
Net deferred tax assets................. $ -- $ --
======= =======
</TABLE>
The net valuation allowance decreased by $1,300,000 and $800,000 during the
twelve months ended September 30, 1995 and October 1, 1994.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company has provided a full
valuation allowance against its net deferred tax assets due to
uncertainties surrounding their realization, primarily due to the Company
having cumulative losses in the last three years, which causes
predictability of earnings in the early future years to be uncertain.
6. Geographic, major customers and concentration of credit risks
-------------------------------------------------------------
The Company and its subsidiaries operate in one segment, principally the
development, manufacture, sale and service of high performance hardware-
assisted systems for simulation of integrated circuits (ICs) and IC-based
electronic systems. The Company sells its products to a broad range of
customers in the communications, semiconductor, multimedia/graphics,
computer, aerospace and consumer electronics industries. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations.
F-12
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
6. Geographic, major customers and concentration of credit risks (continued)
-------------------------------------------------------------------------
Total international sales by geographic region, including export sales and
foreign operation net revenues, are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
September 30, October 1, October 2,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Far East $ 4,841 $2,511 $1,276
Europe 5,613 3,008 1,801
Other 106 64 253
------- ------ ------
$10,560 $5,583 $3,330
======= ====== ======
</TABLE>
For the fiscal year ended September 30, 1995, one distributor accounted for
approximately 15% of net revenues. In fiscal 1994, one customer and one
distributor accounted for approximately 18% and 10% of net revenues,
respectively. In fiscal 1993, no customer accounted for more than 10% of
net revenues.
7. Subsequent events
-----------------
In October 1995, the Company sold 1,150,000 shares of common stock in a
public offering resulting in net proceeds to the Company of approximately
$10,500,000.
F-13
<PAGE>
IKOS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Deductions End
of Period Expenses Write-offs of Period
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 2, 1993 $122 $ -- $ -- $122
==== ===== ===== ====
Year ended October 1, 1994 $122 $ -- $ -- $122
==== ===== ===== ====
Year ended September 30, 1995 $122 $ 49 $ -- $171
==== ===== ===== ====
Warranty reserve:
Year ended October 2, 1993 $ 60 $ 34 $ -- $ 94
==== ===== ===== ====
Year ended October 1, 1994 $ 94 ($18) $ -- $ 76
==== ===== ===== ====
Year ended September 30, 1995 $ 76 $ 18 $ -- $ 94
==== ===== ===== ====
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<S> <C> <C>
4.1 Certificate of Amendment of Certificate of Incorporation filed May 5,
1994 (Incorporated by reference to Exhibit 4.1 of the Company's
registration statement on Form S-2 effective October 12, 1995.)
4.2 Certificate of Amendment of Certificate of Incorporation filed April
24, 1995 (Incorporated by reference to Exhibit 4.2 of the Company's
registration statement on Form S-2 effective October 12, 1995.)
4.4 Rights agreement dated as of January 27, 1992 between the Company and
Manufacturers Hanover Trust Company of California, Rights Agent.
(Incorporated by reference to Exhibit (C)1, in the Company's report on
Form 8-K filed February 10, 1992.)
10.1 Lease Agreement for the Company's principal facility dated March 20,
1992, between Ames Avenue Associates and the Company, as amended.
(Incorporated by reference to Exhibit 10.1 of the Company's annual
report on 10-K for the year ending September 26, 1992.)
10.2 Form of Director and Officer Indemnity Agreement. (Incorporated by
reference to Exhibit 10.6 of the Company's registration statement on
Form S-1 effective July 25, 1990.)
10.3 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10.14
of the Company's registration statement on Form S-1 effective July 25,
1990.)
10.4 Patent Cross License Agreement dated May 17, 1989 with Zycad
Corporation. (Incorporated by reference from Zycad Corporation's
Annual Report on Form 10-K filed April 2, 1990.) (Incorporated by
reference to Exhibit 10.20 of the Company's registration statement on
Form S-1 effective July 25, 1990.)
10.5 International Distributorship Agreement dated April 11, 1988, with C.
Itoh & Co., Ltd. (with certain confidential portions excised).
(Incorporated by reference to Exhibit 10.24 of the Company's
registration statement on Form S-1 effective July 25, 1990.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<S> <C> <C>
10.6 OEM Software License Agreement between CAD Language Systems, Inc. and
IKOS Systems, Inc. dated June 22, 1989 and amendment dated September
1991. (Incorporated by reference to Exhibit 10.18 of the Company's
Annual Report for the year ended September 28, 1991.)
10.7 Technology Transfer and Joint Development Agreement with Racal-Redac,
Inc. dated July 1, 1993 (with certain portions excised).
(Incorporated by reference to Exhibit 10.19 of the Company's quarterly
report on Form 10-Q for the quarter ended July 3, 1993.)
10.8 Settlement Agreement and Release dated March 31, 1994 between Racal
Redac, Inc. and the Company (Incorporated by reference to Exhibit
10.13 of the Company's registration statement on Form S-2 effective
October 12, 1995)
10.9 Software License Agreement with Compass Design Automation dated
December 31, 1993. (Incorporated by reference to Exhibit 10.17 of the
Company's quarterly report on Form 10-Q for the quarter ended January
1, 1994.)
10.10 Agreement dated June 2, 1994, by and between the Company and Gerald S.
Casilli. (Incorporated by reference to Exhibit 10.18 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.11 Agreement dated June 2, 1994, by and between the Company and William
B. Fazakerly. (Incorporated by reference to Exhibit 10.18 of the
Company's quarterly report on Form 10-Q for the quarter ended July 2,
1994.)
10.12 Agreement dated June 2, 1994, by and between the Company and Daniel R.
Hafeman. (Incorporated by reference to Exhibit 10.18 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.13 Agreement dated June 2, 1994, by and between the Company and Stephen
McLaughlin. (Incorporated by reference to Exhibit 10.18 of the
Company's quarterly report on Form 10-Q for the quarter ended July 2,
1994.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<S> <C> <C>
10.14 Agreement dated June 2, 1994, by and between the Company and Larry A.
Melling. (Incorporated by reference to Exhibit 10.18 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.15 Agreement dated June 2, 1994, by and between the Company and Ramon A.
Nunez. (Incorporated by reference to Exhibit 10.18 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.16 Agreement dated June 2, 1994, by and between the Company and Joseph W.
Rockom. (Incorporated by reference to Exhibit 10.18 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.17 The Company's 1995 Outside Directors Stock Option Plan. (Incorporated
by reference to Exhibit 10.22 of the Company's registration statement
on Form S-2 effective October 12, 1995)
10.18 Employment Agreement dated September 27, 1994 by and between the
Company and Ramon A. Nunez. (Incorporated by reference to Exhibit
10.23 of the Company's registration statement on Form S-2 effective
October 12, 1995)
10.19 Development and OEM Agreement for Verilog/IKOS Co-simulation Interface
dated August 26, 1994 by and between the Company and Precedence
Incorporated. (Incorporated by reference to Exhibit 10.24 of the
Company's registration statement on Form S-2 effective October 12,
1995)
10.20 Agreement dated June 19, 1995 by and between the Company and William
B. Fazakerly.
11.1 Statement of Computation of Earnings per Share.
22.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
</TABLE>
<PAGE>
EXHIBIT 10.20
AGREEMENT
This Agreement (the "Agreement") is made and entered into the 19th day of
June, 1995, by and between IKOS Systems, Inc., a Delaware corporation (the
"Company"), and William B. Fazakerly (the "Employee").
WHEREAS, the Company desires to continue to retain the services of the
Employee in connection with the conduct of its business and the Employee is
willing to continue to render such services, subject to receipt of the benefits
described in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth,the parties agrees as follows:
COMPENSATION AND EMPLOYMENT: The Company agrees that Employee shall continue to
- ----------------------------
receive salary, vacation, sick leave, insurance, and health benefits as follows:
a. Base salary of $168,000/year with annual review and appropriate raises.
b. An advance bonus of $36,000/year, payable in equal installments each pay
period (every two weeks). This bonus will be offset dollar-for-dollar by
profit sharing and other bonuses Employee would be eligible to receive each
year. In the event Employee's profit sharing and other bonuses add up to
less than the amount paid to Employee ($36K) on an annual basis (COLA and
advance bonus for calendar 1995), then the difference will be forgiven at
the end of the year. In the event Employee's profit sharing and other
bonuses add up to more than the amount paid to Employee ($36K) on an annual
basis (COLA and advance bonus for calendar 1995), then the difference will
be paid to Employee at the time IKOS issues the appropriate bonus checks
for the respective year.
c. Vacation, sick leave, insurance, and health benefits commensurate with the
above base salary.
d. Any other compensation which is made available to all Company officers, as
directed and approved by the CEO or the Board of Directors.
e. Normal vesting of stock options.
Employee agrees to continue as a full-time employee of the Company, and to use
best efforts to perform his job assignment (as hereinafter defined).
JOB ASSIGNMENT: Employee's title will continue as Chief Technical Officer and
- --------------
Director of Corporate Strategy. Employee will formulate corporate market and
product strategy in response to industry developments and make appropriate
recommendations to senior management. Employee will also present this strategy
to customers, potential customers, investors, and market analysts. Near-term
efforts will include definition of the Company's ASIC library strategy and
definition of the Company's next generation product. Employee will report to the
Company's CEO and will work closely with the senior staff and other employees in
the pursuit of objectives. An outline of near-term tasks and objectives is
contained in Exhibit A.
RELOCATION: If at any time the Company and the employee mutually agree to
- ----------
Employee's relocation to Cupertino, California, the Company agrees to pay
expenses incurred by Employee as a result of this relocation. These expenses
will be limited to $20,000.
<PAGE>
EXHIBIT 10.20
SEVERANCE: If (a) the Employee's employment with the Company is terminated
- ---------
without cause, or (b) Employee terminates his employment with the Company for
cause (as hereinafter defined), Employee shall continue to receive salary,
insurance, health benefits, and stock vesting as he would have received if he
were continually employed by the Company for a period of six (6) months
following the Date of Termination (as hereinafter defined). Such severance
benefits will be discontinued if Employee is employed before the six-month
period has elapsed.
Cause Defined: For the purposes of termination by the Company, termination for
- -------------
cause will include, but not be limited to, the following: (i) the continued
neglect by Employee of his responsibilities and duties to the Company, (ii) any
act of dishonesty or falsification of records by Employee relating to Employee's
employment, (iii) conviction of Employee for any felony or a crime involving
embezzlement or fraud, (iv) Employee's violation or failure to comply with any
of the Company's reasonable rules and regulations, or (v) Employee's failure to
serve less than forty (40) hours per week with the Company.
For the purposes of termination by Employee, termination for cause will include,
but not be limited to, the following: (1) requirement for Employee to work at a
location other than Waldwick New Jersey without Employee's consent, (ii)
reduction in Employee's base salary, expenses, or benefits without Employee's
consent, or (iii) alteration of Employee's job requirements or responsibilities
without Employee's consent.
Date of termination: For the purposes hereof, in the event the Company
- -------------------
terminates Employee's employment with the Company, the Date of Termination shall
be the date that Employee is notified, in writing, by the Company. In the event
that the Employee terminates employment with the Company, the Date of
Termination shall be the date Employee notifies the Company, in writing, that he
is terminating his employment.
Waiver or Modification: Any waiver, modification or amendment of any provision
- ----------------------
of this Agreement shall be effective only if in writing in a document that
specifically refers to this Agreement and such document is signed by the parties
against whom enforcement thereof is sought.
Entire Agreement: This Agreement constitutes the full and complete
- ----------------
understanding and agreement of the parties hereto with respect to the subject
matter covered herein and supersedes all prior oral and written understandings
and agreements with respect thereto.
Severability: If any provision of this Agreement is found to be unenforceable
- ------------
in any respect by a court of competent jurisdiction, such unenforceability shall
not affect the remaining provisions of this Agreement, but this Agreement shall
be construed as if such unenforceable provision had been limited or modified
(consistent with its general intent) to the extent necessary so that the
provision shall be enforceable. If it is not possible to so limit or modify such
unenforceable provision, the Agreement shall be construed as if such
unenforceable provision had never been contained herein and the parties will use
their best efforts to substitute an enforceable provision which implements the
purposes and intents and provides the same economic benefit to the parties as
the unenforceable provision.
Notices: Any notice to be given by either party hereunder shall be in writing
- -------
and shall be deemed to have been duly given if delivered or mailed, certified or
registered mail, postage prepaid, as follows: to the Company at: 19050
Pruneridge Avenue, Cupertino, CA 95014, attention: Chief Executive Officer, and
to the Employee at his address as it appears on the payroll records of the
Company, or to such other address as may be furnished to the other party by
written notice.
<PAGE>
EXHIBIT 10.20
ARBITRATION: Any controversy between the Company and Employee relating to this
- -----------
Agreement shall be settled by arbitration pursuant to California Arbitration Act
contained in Section 1280 through 1294.2 of the California Code of Civil
Procedure.
GOVERNING LAW: This Agreement shall be governed and construed in accordance
- -------------
with the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and the year first above written.
IKOS Systems, Inc.
By: /s/ Gerald S. Casilli
----------------------------
Gerald S. Casilli
Chairman and CEO
/s/ William B. Fazakerly
----------------------------
William B. Fazakerly
<PAGE>
EXHIBIT 10.20
EXHIBIT A
SPECIFIC NEAR-TERM TASKS AND OBJECTIVES
. Patent search and patent pursuit for Compiled Gate Accelerator.
. Presentation and pursuit of customer partners for CGA.
. Generation of User Guide/Objective Specification for CGA.
. ASIC vendor programs - two vendors to sign-off by end of 1995.
. Completion of VeriLib and UDP database specifications.
. Tracking of VITAL standardization and adoption by vendors.
. Positioning of IKOS' ASIC library strategy and program.
. Technical support and strategy for sales to key ASIC customers.
<PAGE>
IKOS SYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------
September 30, October 1, October 2,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income (loss) before extraordinary credit $3,156 $ 841 ($8,750)
Extraordinary credit - forgiveness of debt 664
----------- ---------- ----------
Net income (loss) $3,156 $1,505 ($8,750)
=========== ========== ==========
Number of shares used in computing per share amounts:
Weighted average common shares outstanding 5,611 5,455 5,415
Common equivalent shares attributable to stock
options (treasury stock method) 540 196 --
----------- ---------- ----------
Total weighted average common shares outstanding 6,151 5,651 5,415
=========== ========== ==========
Income (loss) before extraordinary cre dit $ 0.51 $ 0.15 ($1.62)
Extraordinary credit -- 0.12 --
----------- ---------- ----------
Net income (loss) $ 0.51 $ 0.27 ($1.62)
=========== ========== ==========
</TABLE>
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 33-36208, 33-47891, 33-58872 and 33-81994) pertaining to the
1988 Stock Option Plan of IKOS Systems, Inc. and in the related Prospectus of
our report dated October 17, 1995, with respect to the consolidated financial
statements and schedules of IKOS Systems, Inc. included in this Annual Report
(Form 10-K) for the year ended September 30, 1995.
ERNST & YOUNG LLP
San Jose, California
December 18, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
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0
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