<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended July 1, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
19050 PRUNERIDGE AVE., CUPERTINO, CA 95014
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(408) 255-4567
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK $.01 PAR VALUE 5,662,000
---------------------------------------
(Title of Class) (Outstanding as of July 1, 1995)
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<PAGE>
IKOS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JULY 1, 1995
INDEX
-----
Part I: Financial Information
Item 1: Financial Statements
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Balance Sheets at
July 1, 1995 and October 1, 1994................ 3
Consolidated Statements of Operations
for the three and nine months ended
July 1, 1995 and July 2, 1994................... 4
Consolidated Statement of Cash Flows
for the nine months ended
July 1, 1995 and July 2, 1994................... 5
Notes to Consolidated Financial Statements...... 6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II: Other Information
Item 4: Submission of Matters to Date 10
Item 6: Exhibits and Reports on Form 8-K................ 11
Signatures............................................... 14
</TABLE>
2
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
July 1, October 1,
1995 1994
----------- -----------
(Unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 4,787 $ 3,422
Short-term investments.................................................. 579 560
Accounts receivable (net of allowance for
doubtful accounts of $122)............................................. 6,258 4,884
Inventories............................................................. 1,168 1,050
Prepaid expenses and other current assets............................... 206 222
-------- --------
Total current assets.................................................. 12,998 10,138
Equipment and leasehold improvements:
Office and evaluation equipment......................................... 2,724 2,576
Machinery and equipment................................................. 4,924 4,664
Leasehold improvements.................................................. 267 267
-------- --------
7,915 7,507
Less allowances for depreciation and amortization..................... (6,344) (5,859)
-------- --------
1,571 1,648
Other assets............................................................. 112 343
-------- --------
$ 14,681 $ 12,129
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 1,589 $ 1,909
Accrued payroll and related expenses.................................... 779 786
Accrued commissions..................................................... 533 650
Deferred maintenance revenues........................................... 2,674 1,979
Other accrued liabilities............................................... 438 373
Current portion of long-term debt....................................... 825 591
-------- --------
Total current liabilities............................................. 6,838 6,288
Long-term debt, less current portion..................................... 1,534 2,151
Accrued rent............................................................. 242 214
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized,
none issued or outstanding............................................. -- --
Common stock, $.01 par value; 25,000 shares authorized,
5,662 and 5,504 issued and outstanding, respectively................... 57 55
Additional paid-in capital............................................... 26,498 25,960
Accumulated deficit..................................................... (20,488) (22,539)
Total stockholders' equity............................................ 6,067 3,476
-------- --------
$ 14,681 $ 12,129
======== ========
</TABLE>
(1) These amounts have been derived from audited financial statements
See notes to consolidated financial statements
3
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net revenues
Product........................................... $6,149 $4,532 $16,683 $12,858
Maintenance....................................... 1,246 928 3,500 2,707
------ ------ ------- -------
Total net revenues........................... 7,395 5,460 20,183 15,565
------ ------ ------- -------
Cost of revenues
Product........................................... 1,552 1,345 4,313 3,781
Maintenance....................................... 274 273 820 678
------ ------ ------- -------
Total cost of revenues....................... 1,826 1,618 5,133 4,459
------ ------ ------- -------
Gross profit...................................... 5,569 3,842 15,050 11,106
Operating expenses:
Research and development.......................... 1,012 1,002 2,966 2,954
Sales and marketing............................... 3,085 2,223 8,353 6,575
General and administrative........................ 542 386 1,576 1,166
------ ------ ------- -------
Total operating expenses..................... 4,639 3,611 12,895 10,695
------ ------ ------- -------
Income from operations.............................. 930 231 2,155 411
------ ------ ------- -------
Other income (expense):
Interest income................................... 42 21 91 49
Interest expense.................................. (23) (33) (86) (44)
Other income...................................... 29 29 87 87
------ ------ ------- -------
Total other income........................... 48 17 92 92
------ ------ ------- -------
Income before income taxes and
extraordinary credit.............................. 978 248 2,247 503
Provision for income taxes.......................... 90 -- 196 --
------ ------ ------- -------
Net income before extraordinary credit....... 888 248 2,051 503
Extraordinary credit - forgiveness of debt... -- 664 -- 664
====== ====== ======= =======
Net income.......................................... $ 888 $ 912 $ 2,051 $ 1,167
====== ====== ======= =======
Earnings per share
Net income before extraordinary credit....... $0.14 0.04 0.34 0.09
Extraordinary credit......................... -- 0.12 -- 0.12
------ ------ ------- -------
Net income................................... $0.14 $0.16 $0.34 $0.21
====== ====== ======= =======
Common and common equivalent shares
used in computing per share amounts............... 6,281 5,615 6,025 5,659
====== ====== ======= =======
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents in thousands
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------
July 1, July 2,
1995 1994
-------- --------
<S> <C> <C>
Operating activities:
Net income................................................. $ 2,051 $ 1,167
Adjustment to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............................ 1,014 1,599
Gain (loss) on retirement of equipment................... 2 (4)
Deferred rent............................................ 28 20
License delivery and technology transfer in
exchange for debt obligation........................... -- (324)
Decrease of long term debt - forgiveness of note......... -- (750)
Changes in operating assets and liabilities:
Accounts receivable...................................... (1,374) (1,626)
Inventories.............................................. (74) 225
Prepaid expenses and other current assets................ 16 (60)
Other assets............................................. (26) 15
Accounts payable......................................... (320) (658)
Accrued payroll and other expenses....................... (7) (94)
Accrued commissions...................................... (117) (82)
Deferred maintenance revenues............................ 695 363
Other accrued liabilities................................ 65 (112)
------- -------
Net cash provided by (used in) operating activities... 1,953 (321)
Investing activities:
Purchases of equipment and leasehold improvements.......... (726) (590)
Purchase of short-term investments......................... (19) (13)
------- -------
Net cash used in investing activities................. (745) (603)
Financing activities:
Principal payments on long-term borrowings................. (383) (590)
Borrowing under promissory note............................ -- 750
Sale of common stock....................................... 540 51
------- -------
Net cash provided by financing activities............. 157 211
------- -------
Increase (decrease) in cash and cash equivalents............. 1,365 (713)
Cash and cash equivalents at beginning of period............. 3,422 2,867
------- -------
Cash and cash equivalents at end of period................... $ 4,787 $ 2,154
======= =======
</TABLE>
See notes to consolidated financial Statements
5
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying consolidated financial statements at July 1, 1995 and for
the three and nine months ended July 1, 1995 and July 2, 1994, have been
prepared in conformity with generally accepted accounting principles,
consistent with those applied in, and should be read in conjunction with,
the audited consolidated financial statements for the year ended October 1,
1994 included in the Form 10-K as filed with the Securities and Exchange
Commission on December 28, 1994. The unaudited interim financial
information reflects all normal recurring adjustments which are, in the
opinion of management, necessary for a fair statement of results for the
interim periods presented. The results for the three and nine month periods
ended July 1, 1995 are not necessarily indicative of results expected for
the full year.
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.
2. Short-Term Investments
In May 1993, the Financial Accounting Standards Board issued Statement 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 following is a summary of held-to-maturity securities:
<TABLE>
<CAPTION>
Held-to-Maturity Securities
---------------------------
(In thousands)
Gross Gross Estimated
Unrealized Unrealized Fair
July 1, 1995 Cost Gains Losses Value
------------ ---- ---------- ---------- ---------
<S> <C> <C> <C> <C>
US Treasury Securities $100 $100
US Corporate Securities 479 479
---- ----
$579 $579
</TABLE>
6
<PAGE>
3. 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.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of (in thousands):
<TABLE>
<CAPTION>
July 1, October 1,
1995 1994
------- ----------
<S> <C> <C>
Purchase parts $ 211 $ 259
Work-in-process 467 502
Finished goods 490 289
------ ------
Total inventories $1,168 $1,050
====== ======
</TABLE>
5. Net Income Per Share
Net income per share is based on the weighted average number of common
shares outstanding during the period. Common equivalent shares from
options have been included in the computation when dilutitive.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET REVENUES
Third quarter net revenues totaled $7.4 million, an increase of 35% over the
same quarter in fiscal 1994. For the nine month period net revenues totaled
$20.2 million, an increase of 30% over the same period in fiscal 1994. The
primary reason for the increase was growth in sales of the Voyager product line
including sales of the new Gemini product line. The Voyager and Gemini products
contributed the vast majority of product net revenues in the three and nine
month periods ending July 1, 1995. Product net revenues exclude maintenance,
consulting, training, rentals and other non-product related sales.
International sales remained strong, accounting for 38% of total revenue for the
third fiscal quarter of 1995, compared to 23% for the same period in fiscal
1994. International sales are expected to continue to increase slightly as a
percentage of total net revenues by year end.
GROSS PROFIT MARGINS
Gross profit margins improved to 75% of net revenues for the third quarter of
fiscal 1995 and for the first nine months of fiscal 1995, compared to 70% and
71% respectively for the same periods in fiscal 1994. The increase was
primarily the result of a change in the product mix to more sales of the Voyager
product line and to a lessor extent the amortization of fixed manufacturing
costs over a broader revenue base.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses in the third quarter of fiscal 1995 totaled
$1,012,000 and the expenses for the first nine months of fiscal 1995 were
$2,966,000. Both were essentially unchanged from the same periods in fiscal
1994.
Research and development expenses are expected to increase in the fourth fiscal
quarter of 1995 primarily due to an expected increase in headcount and the
associated recruiting expenses, as the Company continues to improve and expand
on the Voyager product line.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by $862,000 to $3,085,000 for the third
fiscal quarter of 1995 and increased by $1,778,000 to $8,353,000 for the first
nine months of fiscal 1995, when compared to the same periods in fiscal 1994.
These increases were primarily the result of increased expenses for the
international operations. Sales and marketing expenses are expected to continue
to increase in absolute dollars in the fourth fiscal quarter reflecting
increased headcount, commission expense and marketing expense.
8
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $542,000 in the third quarter of fiscal
1995 and $1,576,000 for the first nine months of fiscal 1995. This compares to
$386,000 and $1,166,000 for the same periods in fiscal 1994. These increases
were due to several factors including additional headcount, increased investor
relations expense, profit sharing, and fees associated with being re-instated on
the National Market System. General and administrative expenses are expected to
increase in both absolute dollars and as a percent of net revenues in the fourth
fiscal quarter of fiscal 1995 primarily as a result of increased headcount,
salaries and related expenses.
INCOME TAXES
The provision for income taxes consists primarily of federal alternative minimum
tax, state taxes and Japanese withholding taxes. The tax rate is substantially
below the federal statutory rate due to the utilization of net operating loss
carryovers.
LIQUIDITY AND CAPITAL RESOURCES
As of July 1, 1995, the Company had $5,366,000 in cash, cash equivalents and
short term investments which compares to $3,982,000 as of October 1, 1994.
Net cash provided by operating activities was $1,953,000 for the nine months
ended July 1, 1995 and was primarily due to net income, depreciation and
amortization and increased deferred maintenance revenues partially offset by
increases in accounts receivable due to increased net revenues and a decrease in
accounts payable and accrued commissions. Net cash used in investing activities
was due primarily to purchases of $726,000 of equipment in the nine months ended
July 1, 1995. The Company expects capital expenditures to increase in the
fourth quarter as the expected headcount additions will require additional
workstations.
Net cash provided by financing activities for the nine months ended July 1, 1995
was $157,000 which was due to the exercise of stock options partially offset by
principal payments on long term debt.
The Company's primary unused sources of funds at July 1, 1995, consisted of
$5,366,000 of cash, cash equivalents and short term investments. The Company
believes that its present cash position and cash generated from operations will
be sufficient to meet its capital needs for at least the next twelve months.
9
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
------- ------------------------- ----
<C> <S> <C>
4.1 Amended and Restated Registration Rights Agreement between the Company
and certain investors dated April 3, 1990. (Incorporated by reference to
Exhibit 4.2 of the Company's registration statement on Form S-1 effective
July 25, 1990).
4.2 Rights agreement dated as of January 27, 1992. (Incorporated by
reference to Exhibit (C)1, in the Company's current 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 Amended and Restated Non-Qualified Stock Option Agreement dated August
17, 1989, between the Company and Mr. Casilli. (Incorporated by
reference to Exhibit 10.7 of the Company's registration statement on Form
S-1 effective July 25, 1990.)
10.4 Amended and Restated Non-Qualified Stock Option Agreement dated August
17, 1989, between the Company and Mr. Casilli. (Incorporated by
reference to Exhibit 10.8 of the Company's registration statement on Form
S-1 effective July 25, 1990.)
10.5 Amended and Restated Non-Qualified Stock Option Agreement dated August
17, 1989, between the Company and Mr. Fazakerly. (Incorporated by
reference to Exhibit 10.9 of the Company's registration statement on Form
S-1 effective July 25, 1990.)
10.6 Amended and Restated Non-Qualified Stock Option Agreement dated August
17, 1989, between the Company and Mr. Fazakerly. (Incorporated by
reference to Exhibit 10.10 of the Company's registration statement on
Form S-1 effective July 25, 1990.
10.7 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.)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
------- ------------------------- ----
<C> <S> <C>
10.8 Non-Qualified Stock Option Agreement dated August 17, 1989, between the
Company and Mr. Casilli. (Incorporated by reference to Exhibit 10.19 of
the Company's registration statement on Form S-1 effective July 25,
1990.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 Agreement dated June 2, 1994, between the Company and Gerald S. Casilli.
(Incorporated by reference to Exhibit 10.17 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.15 Agreement dated June 2, 1994, 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.)
10.16 Agreement dated June 2, 1994, between the Company and Daniel R. Hafeman.
(Incorporated by reference to Exhibit 10.19 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.17 Agreement dated June 2, 1994, between the Company and Stephen M.
McLaughlin. (Incorporated by reference to Exhibit 10.20 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.18 Agreement dated June 2, 1994, between the Company and Lawrence A.
Melling. (Incorporated by reference to Exhibit 10.21 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
------- ------------------------- ----
<C> <S> <C>
10.19 Agreement dated June 2, 1994, between the Company and Ramon A. Nunez.
(Incorporated by reference to Exhibit 10.22 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.20 Agreement dated June 2, 1994, between the Company and Joseph W. Rockom.
(Incorporated by reference to Exhibit 10.23 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
11.1 Statements of Computation of Earnings Per Share
</TABLE>
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IKOS SYSTEMS, INC.
-----------------
Registrant
Date: August 11, 1995 /s/ Joseph W. Rockom
---------------------------
(JOSEPH W. ROCKOM, CFO)
Principal Financial Officer,
Duly Authorized Officer
13
<PAGE>
Exhibit 11.1
IKOS SYSTEMS, INC.
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
July 1, July 2, July 1, July 2,
1995 1994 1995 1994
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net income $ 888 $ 912 $2,051 $1,167
Number of shares used in computing per share amounts:
Weighted average common stock outstanding......... 5,592 5,454 5,541 5,445
Common equivalent shares attributable to
stock options (treasury stock method)........... 689 161 484 214
------ ------ ------ ------
Total weighed average common shares outstanding... 6,281 5,615 6,025 5,659
====== ====== ====== ======
Net income per share................................ $ 0.14 $ 0.16 $ 0.34 $ 0.21
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-02-1994
<PERIOD-END> JUL-01-1995
<CASH> 4,787
<SECURITIES> 579
<RECEIVABLES> 6,380
<ALLOWANCES> (122)
<INVENTORY> 1,168
<CURRENT-ASSETS> 12,998
<PP&E> 7,915
<DEPRECIATION> (6,344)
<TOTAL-ASSETS> 14,681
<CURRENT-LIABILITIES> 6,838
<BONDS> 0
<COMMON> 57
0
0
<OTHER-SE> 6,010
<TOTAL-LIABILITY-AND-EQUITY> 14,681
<SALES> 16,683
<TOTAL-REVENUES> 20,183
<CGS> 4,313
<TOTAL-COSTS> 5,133
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 2,247
<INCOME-TAX> 196
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,051
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
