<PAGE>
RULE NO.424(b)(4)
REGISTRATION NO. 33-62525
PROSPECTUS
1,000,000 Shares
[LOGO OF IKOS SYSTEM APPEARS HERE]
Common Stock
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All of the shares of Common Stock being offered hereby are being sold by
IKOS Systems, Inc. ("IKOS" or the "Company"). The Common Stock is quoted on
the Nasdaq National Market under the symbol "IKOS." On October 12, 1995, the
last reported sale price for the Common Stock, as reported on the Nasdaq
National Market, was $10.75 per share.
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share..................................... $10.00 $.625 $9.375
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Total (3)..................................... $10,000,000 $625,000 $9,375,000
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</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$300,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 150,000 shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $11,500,000, $718,750 and $10,781,250, respectively. See
"Underwriting."
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The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, and subject to the right of the Underwriters to reject any
order in whole or in part. It is expected that certificates for the shares of
Common Stock will be available for delivery in New York, New York, on or about
October 18, 1995.
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Needham & Company, Inc. Preferred Technology, Inc.
The date of this Prospectus is October 12, 1995.
<PAGE>
Nsim is IKOS' second-generation hardware
accelerator with a capacity of up to 4 million
primitives. It is a plug-in mixed-level acceler-
ator for Voyager and Gemini that delivers
speed, capacity and ease of use.
[PHOTO DEPICTING VOYAGER SERIES OF IKOS PRODUCTS INCLUDING VOYAGER VS, VOYAGER
CS, VOYAGER DSX AND NSIM APPEARS HERE. ALSO DEPICTED IS GEMINI CSX.]
The Voyager(R) Series of
VHDL mixed-level prod- ucts IKOS' LANGUAGE-BASED
includes Voyager VS, a fully DESIGN VERIFICATION
1076-compli- ant VHDL and SOLUTIONS FOR ASIC AND
behavioral simulator with SYSTEM DESIGNERS
support for industry
standard software and
hardware models; Voyager CS,
a high-perfor- mance mixed-
level software simulator;
Voyager CSX, a high-
performance mixed-level
simulator with seamless
integration to Nsim; and
Voyager FS, a software
mixed-level concurrent fault
simulator which is scheduled
for release in the fourth
calendar quarter of 1995.
Gemini(TM) CSX, a high-
performance mixed-level
simulator, is built on
high-performance co-sim-
ulation technologies from
IKOS and Precedence.
Gemini CSX provides a
transparent interface
between Cadence's Verilog-
XL environment and Nsim,
IKOS' hardware
accelerator.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the consolidated financial statements
and notes thereto, appearing elsewhere or incorporated by reference in this
Prospectus.
THE COMPANY
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. 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.
There has been substantial growth in the market for high-speed, complex ICs.
Designers currently are creating ICs consisting of millions of gates
implemented in deep submicron, or less than 0.6 micron, geometries. The
electronic design automation (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 twenty years. 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
requirements for simulating more complex IC designs. The Company believes that
as the density and complexity of ICs and electronic systems designs increase,
so does the need for more thorough IC design simulation. IKOS believes that
rapid and comprehensive simulation of complex IC designs can best be achieved
by simulation systems incorporating dedicated hardware and software, as these
technologies enable iterative, mixed-level simulation demanded by complex IC
designs.
IKOS' mission is to be the leading supplier of simulation tools for the
verification of complex IC designs. The Company designs and markets systems
which include software and hardware based simulation algorithms. The software
components of the IKOS systems include behavioral, gate and mixed-level
simulators, interfaces to integrate IKOS systems with other EDA tools and cell
libraries and library development tools for modeling of ICs. The hardware
component of the IKOS systems is a family of special purpose, massively
parallel computers incorporating proprietary simulation algorithms. IKOS
simulation systems run on Sun Microsystems and Hewlett-Packard workstations.
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 the Company believes are key users and designers of ICs and IC-
based systems for high-performance applications. The Company performs final
assembly and test of all of its products in its Cupertino, California
facilities. The Company utilizes third parties for all major subassembly
manufacturing, including printed circuit boards and custom ICs.
The Company was incorporated in California in September 1985 and was
reincorporated in Delaware in July 1990. The Company's principal executive
offices are located at 19050 Pruneridge Avenue, Cupertino, California 95014.
Its telephone number is (408) 255-4567.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered....................... 1,000,000 shares
Common Stock outstanding after the
offering................................... 6,907,560 shares (1)
Nasdaq National Market symbol ............. IKOS
Use of proceeds............................ General corporate purposes, including working capital
and capital expenditures. See "Use of Proceeds."
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
-------------------------- -----------------
SEPT. 26, OCT. 2, OCT. 1, JULY 2, JULY 1,
1992 1993 1994 1994 1995
--------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues...................... $13,942 $16,528 $21,636 $15,565 $20,183
Gross profit...................... 9,949 10,197 15,706 11,106 15,050
Income (loss) from operations..... (3,364) (8,875) 802 411 2,155
Net income (loss)................. (3,107) (8,750) 1,505 1,167 2,051
Net income (loss) per share (2)... $ (0.58) $ (1.62) $ 0.27 $ 0.21 $ 0.34
Number of shares used in per share
computation (2)................... 5,379 5,415 5,651 5,659 6,025
</TABLE>
<TABLE>
<CAPTION>
JULY 1, 1995
OCT. 1, ----------------------
1994 ACTUAL AS ADJUSTED(3)
------- ------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................. $ 3,850 $ 6,160 $15,235
Total assets..................................... 12,129 14,681 23,756
Long term debt, less current portion............. 2,151 1,534 1,534
Total stockholders' equity....................... 3,476 6,067 15,142
</TABLE>
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(1) Based on the number of shares outstanding at September 2, 1995. Excludes
(i) 1,113,310 shares of Common Stock subject to outstanding options under
the Company's 1988 Stock Option Plan, (ii) 57,500 shares of Common Stock
subject to certain other outstanding options and (iii) 89,271 shares
available for future issuance as of September 2, 1995. See Note 4 of Notes
to Consolidated Financial Statements.
(2) For a description of the net income (loss) per share, see Note 1 of Notes
to Consolidated Financial Statements.
(3) Adjusted to reflect the sale of the 1,000,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
Unless otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. Additionally,
unless otherwise indicated, all share and per share information has been
adjusted to reflect a one-for-two reverse stock split which occurred on April
24, 1995.
IKOS, the Company's facing parrots logo and Voyager are registered trademarks
of the Company. This Prospectus also includes trade names and trademarks of
companies other than IKOS.
4
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. In addition
to the other information in this Prospectus, the following factors should be
considered carefully in evaluating an investment in the shares of Common Stock
offered by this Prospectus.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors including the timing of
customer development projects and purchase orders to purchase the Company's
hardware-assisted simulation systems, new product announcements and releases
by the Company and other companies, gain or loss of significant customers,
price discounting of the Company's products, the timing of expenditures,
customer product delivery requirements, availability and cost of components or
labor and economic conditions generally and in the electronics industry
specifically. Any unfavorable change in these or other factors could have a
material adverse effect on the Company's operating results for a particular
quarter. Many of the Company's customers order on an as-needed basis and often
delay issuance of firm purchase orders until their project commencement dates
are determined, and, as a result, the Company has in the past operated with no
significant backlog. Quarterly revenue and operating results will therefore
depend on the volume and timing of orders received during the quarter, which
are difficult to forecast accurately. Moreover, a significant portion of the
Company's revenue in each quarter generally results from shipments during the
last few weeks of the quarter from orders generally received in the last month
of a quarter. The absence of significant backlog and the concentration of
sales at the end of the quarter limit the Company's ability to plan or adjust
operating expenses and production and inventory levels. Therefore, if
anticipated shipments in any quarter do not occur or are delayed, expenditure
levels could be disproportionately high as a percentage of revenue, and the
Company's operating results for that quarter would be adversely affected. In
addition, sales of individual systems with high average sales prices can
constitute a significant percentage of the Company's quarterly revenue.
Operating results in any period should not be considered indicative of the
results to be expected for any future period, and there can be no assurance
that the Company's net revenues will continue to increase, that its recent
rate of quarterly revenue and earnings growth will be sustained, or that the
Company will remain profitable in any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results."
DEVELOPING MARKET; ACCEPTANCE OF THE COMPANY'S PRODUCTS
The Company began shipping commercial volumes of its Voyager systems in
fiscal 1992. Substantially all of the Company's product revenues since fiscal
1993 have been derived from the sale of its Voyager systems. The Company
introduced its Gemini series in the second quarter of fiscal 1995. There can
be no assurance that market acceptance of these products will continue. The
adoption of the Company's hardware-assisted simulation products for the
verification of IC and system designs is expected to depend on the continued
increasing complexity of ICs designed for electronic systems, integration of
the Company's products with other tools for IC design and simulation, the
ability of hardware-assisted simulation systems to shorten the time of
simulation of IC designs, the development and market acceptance of alternative
simulation technologies such as cycle-based software simulation, formal proof
and hybrid timing verifiers, and modular design techniques, and industry
acceptance of the need for mixed-level hardware-assisted simulation. Because
the market for hardware-assisted simulation products is evolving, it is
difficult to predict with any assurance whether the market for hardware-
assisted simulation products will continue to expand. There can be no
assurances that such market will expand or, even if such market expands, that
the Company's products will achieve the market acceptance required to maintain
revenue growth and continued profitability in the future. See "Business--
Industry Background."
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
5
<PAGE>
to this segment of the market. The Company currently experiences competition
from hardware-assisted simulation-based systems sold by Zycad Corporation
("Zycad") and traditional software verification methodologies. 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. See "Business--Competition."
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The EDA industry is characterized by extremely rapid technological change in
both hardware and software development, frequent new product introductions,
evolving industry standards and changing customer requirements. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's future success will depend upon its ability to enhance its current
series of hardware-assisted systems and to design, develop and support its
next-generation systems on a timely basis. Those efforts require a high level
of expenditures for research and development by the Company to address the
increasingly sophisticated needs of the customers. For example, all of the
Company's current products operate in, and planned future products will
operate in, the Unix operating environment, an industry standard in the EDA
market. In the event that another operating system, such as Windows NT,
becomes an industry standard, the Company may be required to port its products
to such new standard. In addition, the Company's systems generally accept
designs in the broadly accepted hardware description language, Verilog-XL,
which Cadence Design Systems, Inc. ("Cadence") has developed and made
available to the Company. In the event Cadence adopts a less cooperative
stance toward the Company in the future, the Company's systems may not be able
to accept designs based on Verilog-XL and the Company may be required to
develop software to accept designs of other hardware description languages.
The inability to accept designs in Verilog-XL may materially adversely affect
the Company's results of operation. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards
or changing customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace,
will be of acceptable quality or will achieve market acceptance. If the
Company is unable, for technological or other reasons, to develop and
introduce products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected. Moreover,
from time to time, the Company may announce new products or technologies that
have the potential to replace the Company's existing product offerings. There
can be no assurance that the announcement of new product offerings will not
cause customers to defer purchases of existing Company products, which could
adversely affect the Company's results of operations. See "Business--Product
Development."
DEPENDENCE ON ELECTRONICS INDUSTRY
The Company is dependent upon the electronics industry and, in particular,
new system and IC design projects. The electronics industry is characterized
by rapid technological change, short product life cycles, fluctuations in
manufacturing capacity and pricing and margin pressures, all of which cause it
to be volatile. As
6
<PAGE>
a result, the electronics industry has historically experienced sudden and
unexpected downturns, at which time the number of new system and IC design
projects decrease. Because most of the Company's sales occur upon the
commencement of new projects for system and IC products, the Company is
dependent upon the rate of commencement of new system and IC design projects.
Accordingly, negative factors affecting the electronics industry could have a
material adverse effect on the Company's results of operations. See
"Business--Industry Background."
DEPENDENCE UPON CERTAIN SUPPLIERS
Certain key components used in the Company's products are presently
available from sole or limited sources. The inability to develop alternative
sources for these sole or limited source components or to obtain sufficient
quantities of these components could result in delays or reductions in product
shipments which could adversely affect the Company's operating results. The
Company's systems use proprietary ASICs that are currently manufactured by
American Microsystems, Inc. ("AMI") and subassemblies that are manufactured by
Micron Technology, Inc. ("Micron").
The Company generally purchases these components, including semiconductor
memories used in the Company's hardware simulators, pursuant to purchase
orders placed from time to time in the ordinary course of business and has no
supply arrangements with any of these source suppliers that require the
suppliers to provide components in guaranteed quantities or at set prices.
Moreover, the manufacture of these components can be extremely complex, and
the Company's reliance on the suppliers of these components exposes the
Company to production difficulties and quality variations that may be
experienced by these suppliers. Therefore, the Company's reliance on its sole
and limited source suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, reduced control
over pricing and timely delivery and quality of acceptable components. While
the timeliness and quality of deliveries to date from such suppliers have been
acceptable, there can be no assurance that problems will not occur in the
future. Any prolonged inability to obtain components or subassemblies in
sufficient quantities or quality or on favorable pricing or delivery terms, or
any other circumstances that would require the Company to seek alternative
sources of supply, could have a material adverse effect on the Company's
operating results and could damage the Company's relationships with its
customers. See "Business--Manufacturing and Suppliers."
CUSTOMER CONCENTRATION
A relatively limited number of customers have historically accounted for a
substantial portion of the Company's net revenues. For the nine months ended
July 1, 1995 and in fiscal 1994, sales to the Company's top ten customers
accounted for approximately 52.9% and 59.9%, respectively, of the Company's
net revenues. In particular, sales to Motorola, Inc. accounted for
approximately 17.7% of net revenues for fiscal 1994. The Company expects that
sales of its products to a limited number of customers will continue to
account for a high percentage of net revenues for the foreseeable future. The
loss of a major customer or any reduction in orders by such customers,
including reductions due to market or competitive conditions in the
electronics or EDA industry, would have an adverse effect on the Company's
results of operations. Moreover, the Company's ability to increase its sales
will depend in part upon its ability to obtain orders from new customers, as
well as the financial condition and success of its existing customers and the
general economy; there can be no assurance that such increases will occur. See
"Business--Customers."
LENGTHY SALES CYCLE
Sales of the Company's products depend, in significant part, upon the
decisions of prospective customers to commence projects for the design and
development of complex ICs and systems. In view of the significant amount of
time and commitment of capital involved in that regard, the Company may
experience delays following initial qualification of the Company's systems as
a result of delays in commencement of the project by a customer. For this and
other reasons, the Company's systems typically have a lengthy sales cycle
during which the Company may expend substantial funds and management effort.
Lengthy sales cycles subject the Company to a number of significant risks,
including fluctuations in operating results, over which the Company has little
or no control.
7
<PAGE>
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on patent, trademark, trade secret
and copyright law to protect its technology. The Company currently holds three
U.S. patents. However, there can be no assurance that any patent owned by the
Company will not be invalidated, circumvented or challenged, that the right
granted thereunder will provide competitive advantages to the Company or that
any of the Company's future patent applications, whether or not challenged by
applicable governmental patent examiners, will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around the patents owned by the Company. The Company generally enters
into confidentiality or license agreements with its employees, distributors
and customers, and limits access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. The
Company has also granted to Racal-Redac, Inc. ("Racal") a security interest in
certain VHDL simulation software jointly developed by the Company and Racal
with respect to payment of a promissory note to Racal by the Company with a
current balance of $1.85 million. 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.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights.
Although the Company does not believe that its products infringe the
proprietary rights of any third parties, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted against the Company or that any
such assertions will not materially adversely affect the Company's business,
financial condition or results of operations. Irrespective of the validity or
the successful assertion of such claims, the Company could incur significant
costs with respect to the defense thereof which could have a material adverse
effect on the Company's business, financial condition or results of
operations. If any claims or actions are asserted against the Company, the
Company may seek to obtain a license under a third party's intellectual
property rights. There can be no assurance, however, that under such
circumstances, a license would be available under reasonable terms or at all.
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. There can
be no assurance that these third party software licenses will continue to be
available to the Company on commercially reasonable terms or otherwise. The
loss of or inability to maintain any of these software licenses could result
in delays or reductions in product shipments until equivalent software could
be identified, licensed and integrated, which would adversely affect the
Company's operating results. In particular, the Company has a software license
agreement with Compass Design Automation, Inc. pursuant to which the Company
licenses certain VHDL tool integration software. This agreement is renewed
annually unless terminated by notice by either party. Loss of this license in
the near term could materially adversely affect the Company's operating
results. See "Business--Proprietary Rights."
INTERNATIONAL SALES
International sales accounted for approximately 33.5% and 23.2% of the
Company's net revenues for the nine month periods ended July 1, 1995 and July
2, 1994, respectively, and 25.8%, 20.2% and 40.3% of the Company's net
revenues in fiscal 1994, 1993 and 1992, respectively. The Company expects that
international sales will continue to account for a significant portion of its
revenues, and plans to continue to expand its international sales and
distribution channels. These revenues involve a number of inherent risks,
including traditionally slower adoption of the Company's products
internationally, the impact of recessionary environments in economies outside
the United States, generally longer receivables collection periods, unexpected
changes in
8
<PAGE>
or impositions of legislative or regulatory requirements, reduced protection
for intellectual property rights in some countries, potentially adverse taxes,
delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers. There can be no assurance that such
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's results of operations.
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. Furthermore, there can be no
assurance that the Company will be able to continue to sell its systems
internationally for United States currency. See "Business--Sales and
Marketing."
DEPENDENCE UPON KEY PERSONNEL
The Company's future performance depends in significant part upon attracting
and retaining key technical, sales, senior management and financial personnel.
Competition for such personnel is intense, and the inability to retain its key
personnel or to attract, assimilate or retain other highly qualified personnel
in the future on a timely basis could have a material adverse effect on the
Company's results of operations. In particular, there are only a limited
number of qualified EDA engineers, and the competition for such individuals is
especially intense. In addition, the Company's ability to compete effectively
and to manage future growth, if any, will require the Company to continue to
train and manage its employee workforce. There can be no assurance that the
Company will be able to do so successfully. The Company's failure to do so
could have a material adverse effect upon the Company's results of operations.
See "Business--Employees."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been, and is likely to
continue to be, highly volatile. Future announcements concerning the Company
or its competitors, quarterly variations in operating results, announcements
of technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, proprietary rights
or other litigation, changes in earnings estimates by analysts or other
factors could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock market has from time-to-time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of technology companies and that have
often been unrelated to the operating performance of particular companies.
These broad market fluctuations may also adversely affect the market price of
the Company's Common Stock. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and Delaware law certain other contractual provisions could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. Certain of these provisions
allow the Company to issue Preferred Stock with rights senior to those of the
Common Stock without any further vote or action by the stockholders, eliminate
the right of stockholders to act by written consent, eliminate cumulative
voting and impose various procedural and other requirements which could make
it more difficult for stockholders to effect certain corporate actions. In
addition, the Company has adopted a preferred stock purchase plan. These
provisions could also have the effect of delaying or preventing a change in
control of the Company. See "Description of Capital Stock--Delaware Law and
Certain Charter Provisions; Preferred Stock Purchase Rights Plan."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$9,075,000 ($10,481,250 if the Underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses. The principal purpose of this offering is to
increase the Company's equity capital. The Company expects to use the net
proceeds from this offering for general corporate purposes, including capital
expenditures and working capital. A portion of the proceeds may also be used
to acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. However, the Company has no present
understandings, commitments, agreements or intentions with respect to any
material acquisitions of other businesses, products or technologies. Pending
use of the net proceeds for the above purposes, the Company intends to invest
such funds in short-term, interest-bearing, investment grade obligations.
PRICE RANGE OF COMMON STOCK
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 1993
First Quarter.................................................... 4.750 2.625
Second Quarter................................................... 5.250 4.000
Third Quarter.................................................... 4.750 3.875
Fourth Quarter................................................... 4.500 2.750
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 (through October 12, 1995)........................ 13.750 8.875
</TABLE>
On October 12, 1995, the last reported sale price for the Common Stock, as
reported on the Nasdaq National Market, was $10.75 per share. The approximate
number of record holders of IKOS stock as of August 15, 1995 was 190. The
approximate number of beneficial holders is estimated to be 1,700 as of that
same date.
DIVIDEND POLICY
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. Through fiscal 1992, the Company
repurchased 482,300 shares. No shares were repurchased in fiscal 1993 or 1994
or the first nine months of fiscal 1995 and the Company does not intend to
repurchase additional shares at this time.
10
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at July 1, 1995 and as adjusted to give effect to the issuance and
sale by the Company of the 1,000,000 shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom. The financial data in
the following table should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto contained in this
Prospectus or incorporated by reference herein.
<TABLE>
<CAPTION>
JULY 1, 1995
---------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Long-term debt, less current portion (1)................. $ 1,534 $ 1,534
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized;
no shares issued and outstanding actual or as
adjusted............................................ - -
Common stock, $0.01 par value; 25,000,000 shares
authorized;
5,662,000 shares issued and outstanding actual;
6,662,000 shares issued and outstanding as adjusted
(2)................................................. 57 67
Additional paid-in capital............................. 26,498 35,563
Accumulated deficit.................................... (20,488) (20,488)
-------- --------
Total stockholders' equity........................... 6,067 15,142
-------- --------
Total capitalization............................... $ 7,601 $ 16,676
======== ========
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) Excludes 1,356,745 shares of Common Stock subject to outstanding options
under the Company's 1988 Stock Option Plan and 91,074 shares available for
future issuance as of July 1, 1995. See Note 4 of Notes to Consolidated
Financial Statements.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statement of operations data for each of the three
years in the period ended October 1, 1994 and for the nine months ended July
1, 1995, and with respect to the Company's consolidated balance sheets at
October 2, 1993, October 1, 1994 and July 1, 1995, are derived from
consolidated financial statements that have been audited by Ernst & Young LLP,
independent auditors, which are included herein. The selected consolidated
statement of operations data for the fiscal years ended September 29, 1990 and
September 28, 1991 and the selected consolidated balance sheet data at
September 29, 1990, September 28, 1991 and September 26, 1992 are derived from
the Company's audited consolidated financial statements but not included
herein. The selected consolidated financial data for the nine months ended
July 2, 1994 is derived from unaudited financial statements of the Company. In
the opinion of management, the unaudited financial statements have been
prepared on the same basis as the audited financial statements referred to
above and include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial position of the
Company and its results of operations for the indicated periods. Operating
results for the nine months ended July 1, 1995 are not necessarily indicative
of results to be expected for any future period. The data should be read in
conjunction with the audited consolidated financial statements and the
unaudited interim financial statements included herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MOS. ENDED
---------------------------------------------- ----------------
SEPT. 29, SEPT. 28, SEPT. 26, OCT. 2, OCT. 1, JULY 2, JULY 1,
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues............ $15,789 $15,122 $13,942 $16,528 $21,636 $15,565 $20,183
Cost of revenues........ 3,269 3,786 3,993 6,331 5,930 4,459 5,133
------- ------- ------- ------- ------- ------- -------
Gross profit.......... 12,520 11,336 9,949 10,197 15,706 11,106 15,050
Operating expenses:
Research and develop-
ment................. 2,308 5,751 2,627 7,896 3,861 2,954 2,966
Sales and marketing... 7,120 8,920 8,879 9,303 9,447 6,575 8,353
General and adminis-
trative.............. 1,357 1,570 1,807 1,873 1,596 1,166 1,576
------- ------- ------- ------- ------- ------- -------
Total operating ex-
penses............. 10,785 16,241 13,313 19,072 14,904 10,695 12,895
Income (loss) from oper-
ations................. 1,735 (4,905) (3,364) (8,875) 802 411 2,155
Other income (expense):
Interest income....... 202 784 329 130 69 49 91
Interest expense...... (157) - - - (75) (44) (86)
Other................. - - - 48 140 87 87
------- ------- ------- ------- ------- ------- -------
Total other income.. 45 784 329 178 134 92 92
Income (loss) before
provision for income
taxes and extraordinary
credit................. 1,780 (4,121) (3,035) (8,697) 936 503 2,247
Provision for income
taxes.................. 85 58 72 53 95 - 196
------- ------- ------- ------- ------- ------- -------
Income (loss) before ex-
traordinary credit..... 1,695 (4,179) (3,107) (8,750) 841 503 2,051
Extraordinary credit--
forgiveness of debt.... - - - - 664 664 -
------- ------- ------- ------- ------- ------- -------
Net income (loss)..... $ 1,695 $(4,179) $(3,107) $(8,750) $ 1,505 $ 1,167 $ 2,051
======= ======= ======= ======= ======= ======= =======
Per share:
Income (loss) before
extraordinary credit. $ 0.36 $ (0.79) $ (0.58) $ (1.62) $ 0.15 $ 0.09 $ 0.34
Extraordinary credit.. - - - - 0.12 0.12 -
------- ------- ------- ------- ------- ------- -------
Net income (loss)... $ 0.36 $ (0.79) $ (0.58) $ (1.62) $ 0.27 $ 0.21 $ 0.34
======= ======= ======= ======= ======= ======= =======
Common and common equiv-
alent shares used in
computing per share
amounts................ 4,691 5,273 5,379 5,415 5,651 5,659 6,025
======= ======= ======= ======= ======= ======= =======
CONSOLIDATED BALANCE
SHEET DATA:
Working capital......... $15,510 $10,397 $ 6,830 $ 1,805 $ 3,850 $ 6,160
Total assets............ 20,672 17,732 15,678 10,806 12,129 14,681
Long-term debt, less
current portion........ - 504 344 2,779 2,151 1,534
Total stockholders' eq-
uity................... 17,880 13,645 10,603 1,903 3,476 6,067
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company was founded in 1984 to develop, manufacture, market and support
high-performance hardware-assisted systems for simulation of integrated
circuits and IC-based electronic systems.
The Company first generated revenue in fiscal 1986. Revenue increased to
$15.8 million in fiscal 1990 and remained relatively constant through fiscal
1993 as the Company undertook a major product development and repositioning
effort. This repositioning was required primarily as a result of difficulties
in integrating the Company's hardware-assisted simulation products with
software tools of other EDA vendors, competitive pricing pressures on the
Company's hardware simulation products, an unsuccessful strategic partnering
relationship with a major EDA software vendor and a market shift away from
low-level, or gate-level, simulation to high-level, or behavioral level,
simulation. Based on these and other factors, the Company realized that it
needed to develop proprietary EDA software products that enhanced the
integration of its hardware products in EDA design environments and to migrate
its product offering to include tools that provided both behavioral level and
gate level simulation. In fiscal 1991 the Company acquired an interest in VHDL
software technology from Racal-Redac, Inc. ("Racal") pursuant to an agreement
that provided for joint development of software products to integrate the
Company's hardware simulation products with other EDA tools and to provide the
necessary mixed-level simulation capabilities. In fiscal 1993 the Company
assumed sole development of the Racal technology when Racal decided to no
longer be involved in the IC design simulation market, resulting in a $3.6
million charge for the acquired technology. During this transition period from
fiscal 1991 through fiscal 1993, the Company incurred cumulative operating
losses of approximately $17.1 million.
In fiscal 1992 the Company introduced the Voyager series of products, which
was the direct result of the Company's repositioning efforts. The first
product in the series, the VHDL software simulator (VS), was released in the
Company's fourth quarter of fiscal 1992. Since fiscal 1992 the Company has
continued to expand its product offerings. The Company released its mixed
level VHDL simulator (Voyager CSX) in the first quarter of fiscal 1993, its
hardware simulator (Nsim) in the second quarter of fiscal 1993, its software
gate level VHDL simulator (Voyager CS) in the second quarter of fiscal 1993
and its mixed level Verilog simulator (Gemini CSX) in the third quarter of
fiscal 1995 and plans to release a software-based VHDL fault simulator
(Voyager FS) in the first quarter of fiscal 1996. Based primarily on the
demand for its Voyager software products and Nsim simulators, the Company has
been profitable on a quarterly basis since the first quarter of fiscal 1994.
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. Historically, the majority of the
Company's net revenues have been derived from the sale of its hardware
simulators. Net revenues under maintenance contracts are recognized ratably
over the term of the related contract, generally twelve months. To date
substantially all of the Company's international sales have been billed and
collected in U.S. dollars.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of
the Company's consolidated statements of operations as a percentage of its net
revenues:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MOS. ENDED
-------------------------- ---------------
SEPT. 26, OCT. 2, OCT. 1, JULY 2, JULY 1,
1992 1993 1994 1994 1995
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 28.6 38.3 27.4 28.7 25.4
----- ----- ----- ----- -----
Gross profit........................ 71.4 61.7 72.6 71.3 74.6
Operating expenses:
Research and development.......... 18.8 47.8 17.8 19.0 14.7
Sales and marketing............... 63.7 56.3 43.7 42.2 41.4
General and administrative........ 13.0 11.3 7.4 7.5 7.8
----- ----- ----- ----- -----
Total operating expenses........ 95.5 115.4 68.9 68.7 63.9
----- ----- ----- ----- -----
Income (loss) from operations....... (24.1) (53.7) 3.7 2.6 10.7
Other income (expense):
Interest income................... 2.3 0.8 0.3 0.3 0.5
Interest expense.................. - - (0.3) (0.3) (0.4)
Other............................. - 0.3 0.6 0.6 0.4
----- ----- ----- ----- -----
Total other income.............. 2.3 1.1 0.6 0.6 0.5
Income (loss) before provision for
income taxes and extraordinary
credit............................. (21.8) (52.6) 4.3 3.2 11.2
Provision for income taxes.......... 0.5 0.3 0.4 - 1.0
----- ----- ----- ----- -----
Income (loss) before extraordinary
credit............................. (22.3) (52.9) 3.9 3.2 10.2
Extraordinary credit--forgiveness of
debt............................... - - 3.1 4.3 -
----- ----- ----- ----- -----
Net income (loss)................. (22.3)% (52.9)% 7.0% 7.5% 10.2%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED JULY 1, 1995 AND JULY 2, 1994
Net revenues. Net revenues increased 29.7% to $20.2 million in the nine
months ended July 1, 1995 as compared to $15.6 million for the comparable
period of fiscal 1994. International revenues increased by 87.2% and domestic
revenues increased by 12.3% over this same period. The primary reason for the
increase was continued growth of unit sales of the Voyager and new Gemini
systems. Maintenance revenue was $3.5 million and $2.7 million for the first
nine months of fiscal 1995 and 1994, respectively, which represents 17.3% and
17.4% of net revenues. International sales (export sales and sales shipped by
the Company's European operation) were $6.8 million and $3.6 million for the
first nine months of fiscal 1995 and 1994, respectively, which represents
33.5% and 23.2% of net revenues.
Gross profit. Gross profit was $15.1 million and $11.1 million or 74.6% and
71.3% of total net revenues for the first nine months of fiscal year 1995 and
1994, respectively. The increase in gross margin was primarily the result of a
change in product mix to a greater percentage of the Voyager systems and to a
lesser extent the absorption of fixed manufacturing costs over a broader
revenue base.
Research and development. Research and development expenses were $3.0
million for each of the first nine months of fiscal 1995 and 1994.
Expenditures were relatively constant during the first nine months of fiscal
1995 as the Company had completed a build-up in staffing and expenses to
effect its major product development program that began in fiscal 1991. As a
percentage of net revenues, research and development expenses decreased to
14.7% for the first nine months of fiscal 1995 as compared to 19.0% for the
first nine months of fiscal 1994. Research and development expenses are
expected to increase in absolute dollars as the Company pursues product
enhancement, new product development and technology development programs.
14
<PAGE>
Sales and marketing. Sales and marketing expenses were $8.4 million and $6.6
million for the first nine months of fiscal 1995 and 1994, respectively. As a
percentage of net revenues, sales and marketing expenses decreased to 41.4%
for the first nine months of fiscal 1995 as compared to 42.2% for the first
nine months of fiscal 1994. 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.
General and administrative. General and administrative expenses were $1.6
million and $1.2 million for the first nine months of fiscal 1995 and 1994,
respectively. As a percentage of net revenues, general and administrative
expenses increased to 7.8% for the first nine months of fiscal 1995 as
compared to 7.5% for the first nine months of fiscal 1994. This increase was
primarily due to additional headcount.
Provision for income taxes. The Company's effective rate of taxation was
8.7% for the first nine months of fiscal 1995. 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. The
Company had no provision for the first nine months of fiscal 1994. As of July
1, 1995, the Company had federal and state net operating loss carryforwards of
approximately $12.0 million and $1.3 million 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.
Utilization of the net operating losses and credits is subject to a
substantial 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 may result in the expiration of net
operating losses and credits before utilization.
In February 1992, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"), which
the Company adopted in 1994. Adoption of FAS 109 did not have a material
effect on the Company's results of operations or financial condition. For
financial reporting purposes, a valuation allowance at July 1, 1995 of $8.6
million has been recorded to offset deferred tax assets recognized under FAS
109 primarily related to the credits on operating loss carryforwards
previously described.
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. See Note 2 of Notes to Consolidated Financial Statements.
FISCAL 1994, 1993 AND 1992
Net revenues. Net revenues for fiscal 1994 were $21.6 million as compared to
net revenues in fiscal 1993 of $16.5 million. This 30.9% increase was the
result of the broader acceptance of the Voyager systems, partially offset by a
decrease in revenues from aging products. International revenues increased by
67.7% and domestic revenues increased by 21.6% over this same period. Net
revenues for fiscal 1993 were $16.5 million as compared to net revenues in
fiscal 1992 of $13.9 million. This 18.5% increase was primarily the result of
a 58.5% increase in domestic sales, offset in part by a 40.7% decline in
international sales. The increase in domestic sales was a direct result of the
initial shipments of the new Voyager systems. The decline in international
sales in fiscal 1993 was primarily the result of weaker economic demand in
Europe, traditionally slower adoption of the Company's products in Europe and
a disproportionate emphasis on increasing U.S. sales relative to international
sales. Total international sales were $5.6 million, $3.3 million and $5.6
million, or 25.8%, 20.2% and 40.3% of net revenues for fiscal 1994, 1993 and
1992.
Gross profit. Gross profit for fiscal 1994, 1993 and 1992 was $15.7 million,
$10.2 million and $9.9 million or 72.6%, 61.7% and 71.4% of net revenues,
respectively. The improvement in gross margin in fiscal 1994 from
15
<PAGE>
fiscal 1993 was primarily the result of the shift in sales to the higher
margin Voyager systems. The decrease in gross margin in fiscal 1993 from
fiscal 1992 was due primarily to increased competitive pricing pressures and
an aging product line.
Research and development expenses. Research and development expenses were
$3.9 million, $7.9 million and $2.6 million for fiscal 1994, 1993 and 1992,
respectively. As a percent of net revenues, research and development expenses
were 17.8%, 47.8% and 18.8% for fiscal 1994, 1993 and 1992, respectively.
Research and development expenses in fiscal 1993 were substantially higher
than both fiscal 1994 and 1992 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. Excluding non-
recurring engineering expense and acquired in-process research and
development, the Company's research and development expenses increased from
fiscal 1992 through fiscal 1994 as a result of the Company's major product
development program.
Sales and marketing expenses. Sales and marketing expenses were $9.4
million, $9.3 million and $8.9 million in fiscal 1994, 1993 and 1992 or 43.7%,
56.3% and 63.7% of net revenues, respectively. Sales and marketing expenses
increased in absolute dollars due to an increase in commission expense, which
is a function of revenues, but decreased as a percentage of net revenues due
to an overall increase in net revenues.
General and administrative expenses. General and administrative expenses
were $1.6 million, $1.9 million and $1.8 million for fiscal 1994, 1993 and
1992, or 7.4%, 11.3% and 13.0% of net revenues, respectively. The decrease in
expenses from fiscal 1993 to fiscal 1994 was primarily the result of the
salary expense incurred for a senior executive officer for almost all of
fiscal 1993 and none in fiscal 1994.
Provision for income taxes. The Company's tax provision for fiscal 1994,
1993 and 1992 primarily relates to foreign withholding taxes.
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
extends the scheduled payments into fiscal 1998. This resulted in an
extraordinary credit of $664,000 after being offset by certain related
expenses.
16
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain quarterly financial information for
fiscal 1994 and the first three quarters of fiscal 1995. This information is
derived from unaudited financial statements that include, in the opinion of
management, all normal recurring accruals necessary for a fair presentation of
the information set forth therein. The operating results for any quarter are
not necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995
--------------------------------- -------------------------
QUARTERS ENDED
------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JAN. 1, APR. 2, JULY 2, OCT. 1, DEC. 31, APR. 1, JULY 1,
1994 1994 1994 1994 1994 1995 1995
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $4,796 $5,309 $5,460 $6,071 $6,108 $6,680 $7,395
Cost of revenues........ 1,360 1,481 1,618 1,471 1,644 1,663 1,826
------ ------ ------ ------ ------ ------ ------
Gross profit.......... 3,436 3,828 3,842 4,600 4,464 5,017 5,569
Operating expenses:
Research and develop-
ment................. 968 984 1,002 907 919 1,035 1,012
Sales and marketing... 2,051 2,301 2,223 2,872 2,582 2,686 3,085
General and adminis-
trative.............. 379 401 386 430 483 551 542
------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses............. 3,398 3,686 3,611 4,209 3,984 4,272 4,639
Income from operations.. 38 142 231 391 480 745 930
Other income (expense):
Interest income....... 14 14 21 20 23 26 42
Interest expense...... - (11) (33) (31) (38) (25) (23)
Other................. 29 29 29 53 29 29 29
------ ------ ------ ------ ------ ------ ------
Total other income.. 43 32 17 42 14 30 48
Income before provision
for income taxes
and extraordinary
credit................. 81 174 248 433 494 775 978
Provision for income
taxes.................. - - - 95 46 60 90
------ ------ ------ ------ ------ ------ ------
Income before extraordi-
nary credit............ 81 174 248 338 448 715 888
Extraordinary credit--
forgiveness of debt.... - - 664 - - - -
------ ------ ------ ------ ------ ------ ------
Net income............ $ 81 $ 174 $ 912 $ 338 $ 448 $ 715 $ 888
====== ====== ====== ====== ====== ====== ======
Earnings per share:
Income before extraor-
dinary credit........ $ 0.01 $ 0.03 $ 0.04 $ 0.06 $ 0.08 $ 0.12 $ 0.14
Extraordinary credit.. - - 0.12 - - - -
------ ------ ------ ------ ------ ------ ------
Net income.......... $ 0.01 $ 0.03 $ 0.16 $ 0.06 $ 0.08 $ 0.12 $ 0.14
====== ====== ====== ====== ====== ====== ======
Common and common equiv-
alent shares used in
computing per share
amounts................ 5,666 5,697 5,615 5,626 5,783 6,011 6,281
====== ====== ====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
The following table presents certain operating statement items expressed as
a percentage of net revenues for each quarter of fiscal 1994 and for the first
three quarters of fiscal 1995.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995
------------------------------- ------------------------
QUARTERS ENDED
--------------------------------------------------------
JAN. 1, APR. 2, JULY 2, OCT. 1, DEC. 31, APR. 1, JULY 1,
1994 1994 1994 1994 1994 1995 1995
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 28.3 27.9 29.6 24.2 26.9 24.9 24.7
----- ----- ----- ----- ----- ----- -----
Gross profit.......... 71.7 72.1 70.4 75.8 73.1 75.1 75.3
Operating expenses:
Research and develop-
ment................. 20.2 18.5 18.4 14.9 15.0 15.5 13.7
Sales and marketing... 42.8 43.3 40.7 47.3 42.3 40.2 41.7
General and adminis-
trative.............. 7.9 7.6 7.1 7.1 7.9 8.2 7.3
----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses............. 70.9 69.4 66.2 69.3 65.2 63.9 62.7
Income from operations.. 0.8 2.7 4.2 6.5 7.9 11.2 12.6
Other income (expense):
Interest income....... 0.3 0.3 0.4 0.3 0.4 0.4 0.6
Interest expense...... - (0.2) (0.6) (0.5) (0.6) (0.4) (0.3)
Other................. 0.6 0.5 0.5 0.9 0.5 0.4 0.3
----- ----- ----- ----- ----- ----- -----
Total other income.. 0.9 0.6 0.3 0.7 0.3 0.4 0.6
Income before provision
for income taxes and
extraordinary
credit................. 1.7 3.3 4.5 7.2 8.2 11.6 13.2
Provision for income
taxes.................. - - - 1.6 0.8 0.9 1.2
----- ----- ----- ----- ----- ----- -----
Income before extraordi-
nary credit............ 1.7 3.3 4.5 5.6 7.4 10.7 12.0
Extraordinary credit--
forgiveness of debt.... - - 12.2 - - - -
----- ----- ----- ----- ----- ----- -----
Net income............ 1.7% 3.3% 16.7% 5.6% 7.4% 10.7% 12.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Gross profit generally increased quarter-to-quarter as a percentage of net
revenues over the seven quarter period but decreased from the second quarter
to the third quarter of fiscal 1994 and from the fourth quarter of fiscal 1994
to the first quarter of fiscal 1995 due to price variances among customer
transactions. Research and development expenses were relatively constant in
dollar amounts but decreased as a percentage of net revenues due to the
increase in net revenues during the period. Sales and marketing expenses were
relatively constant as a percentage of net revenues during the seven quarter
period, except for a large increase in the fourth quarter of fiscal 1994 due
to increased sales commissions.
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as the timing of customer
development projects and related purchase orders to purchase the Company's
hardware-assisted simulation systems, new product announcements and releases
by the Company and other companies, gain or loss of significant customers,
price discounting of the Company's products, the timing of expenditures in
anticipation of increased sales, customer product delivery requirements,
availability and cost of components or labor and economic conditions generally
and in the electronics industry specifically. Any unfavorable change in these
or other factors could have a material adverse effect on the Company's
operating results for a particular quarter. Many of the Company's customers
order on an as-needed basis and often delay delivery of firm purchase orders
until their project commencement dates are determined, and, as a result, the
Company operates with no significant backlog. Quarterly revenue and operating
results will therefore depend on the volume and timing of orders received
during the quarter, which are difficult to forecast accurately. Operating
results in any period should not be considered indicative of the results to be
expected for any future period, and there can be no assurance that the
Company's net revenues will continue to increase, that its recent rate of
quarterly revenue and earnings growth will be sustained, or that the Company
will remain profitable in any future period. See "Risk Factors--Potential
Fluctuations in Quarterly Results."
18
<PAGE>
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. In addition, the Company's operations
provided cash during fiscal 1994 and the first nine months of fiscal 1995.
Operating Activities. The Company's operating activities provided cash of
$2.0 million in the first nine months of fiscal 1995 and $1.4 million in
fiscal 1994 and used cash of $686,000 in fiscal 1993 and $858,000 in fiscal
1992. For the first nine months of fiscal 1995 and fiscal 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 associated with increases in net revenues. In fiscal 1993
and 1992, 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 $726,000, $959,000, $1.0 million and $1.3 million for the
first nine months of fiscal 1995 and for fiscal 1994, 1993 and 1992,
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.
In accordance with Statement of Financial Accounting Standards No. 86, the
Company capitalizes eligible computer software costs upon achievement of
technological feasibility subject to net realizable value considerations. The
Company had defined technological feasibility as completion of a working
model. For the nine months ended July 1, 1995 and July 2, 1994, such
capitalizable costs were insignificant. Accordingly, the Company has charged
all such costs to research and development expenses for these periods. For
fiscal 1994, the Company did not capitalize any costs for software. For fiscal
1993 and 1992, the Company capitalized $513,000 and $1.0 million,
respectively.
Financing Activities. During the first nine months of fiscal 1995 and during
fiscal 1994, 1993 and 1992, the Company received cash of $540,000, $68,000,
$50,000 and $65,000, respectively, upon the exercise of options to purchase
Common Stock.
The Company borrowed $750,000 under an equipment purchase loan in fiscal
1994. The Company's principal payments on long term borrowing were $383,000,
$683,000, $335,000 and $180,000 for the first nine months of fiscal 1995 and
for fiscal 1994, 1993, and 1992, respectively. See Note 2 of Notes to
Consolidated Financial Statements.
The Company's primary unused sources of funds at July 1, 1995 consisted of
$4.8 million of cash and cash equivalents, in addition to $579,000 of short-
term investments. The Company expects to make capital expenditures throughout
the remainder of fiscal 1995 and fiscal 1996. The Company believes that net
proceeds from this 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 financings. There can be no assurance that such financing can be
obtained on favorable terms, if at all.
19
<PAGE>
BUSINESS
THE COMPANY
IKOS Systems, Inc. ("IKOS" or the "Company") 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. 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.
INDUSTRY BACKGROUND
There has been substantial growth in the market for high performance,
complex ICs for communications, multimedia, graphics, computing and other
applications. These products have been enabled, in significant part, by
improvements in silicon process technology which have made possible the design
and manufacture of these 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. Dataquest, a market
research firm, estimates that almost 1,000 application specific integrated
circuit (ASIC) designs with greater than 100,000 gates will be started in 1995
and this number will increase to approximately 2,000 in 1996 and 3,200 in
1997. At the same time, competitive pressures are forcing designers to shorten
development cycles in order to gain the economic benefits of earlier product
introduction.
The electronic design automation ("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 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.
The Company believes that as the density and complexity of electronic
systems designs increase, so does the need for more thorough design simulation
in the IC design process. 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 of 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.
20
<PAGE>
IC DESIGN PROCESS
USING HIGH-LEVEL LANGUAGE, SYNTHESIS AND SIMULATION
[GRAPHIC SHOWING COMPLEXITY OF IC DESIGN PROCESS AND
RESULTING DIFFICULTIES IN FUNCTIONAL AND TIMING DESIGNS APPEARS HERE]
Simulation of complex 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.
21
<PAGE>
THE IKOS SOLUTION
The Company's mission is to be the leading supplier of simulation tools for
the verification of complex IC designs. The Company defines a complex IC
design as a design with 100,000 or more gates. The Company believes that rapid
and comprehensive simulation of complex ICs can best be achieved by simulation
systems incorporating dedicated hardware and software, as these technologies
enable the iterative, mixed-level simulation demanded by 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 insert newly
developed gate level details into the behavioral level design and
simultaneously simulate at both levels of abstraction, thereby reducing the
time to simulate and verify a complex IC design.
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 design. Based on a simulation benchmark report
published by a third party, the IKOS combined hardware and software system
enables gate-level simulation of a complex ICs to be completed 50 to 100 times
faster than software simulators operating on general purpose workstations. For
example, in one case, a gate-level simulation which required in excess of four
days using a gate-level software simulation system was completed in
approximately one hour using an IKOS simulation system. The software
components of the IKOS simulation systems run on Sun Microsystems, Inc. and
Hewlett-Packard Company workstations.
22
<PAGE>
IKOS SOLUTION AND PRODUCTS IN THE IC DESIGN PROCESS
IC Design Process Function of IKOS Products
IKOS Solution Employed
Software simulation of For VHDL:
VHDL and Verilog-XL Voyager VS
designs; mixed-level (behavioral)
simulation with hardware Voyager CS
acceleration (mixed-level)
Voyager CSX (hardware
accelerated)
For Verilog:
Gemini CSX
(mixed-level)
Hardware assisted Nsim linked to
simulation of gate-level Voyager
designs; mixed-level via Voyager CSX for
simulation with hardware VHDL or Gemini via
acceleration Gemini CSX
for Verilog-XL
[GRAPHIC SHOWING IC DESIGN PROCESS, RELATED FUNCTIONS OF IKOS'
SOLUTION AND THE VARIOUS IKOS PRODUCTS EMPLOYED IN SUCH SOLUTION APPEARS HERE]
23
<PAGE>
IKOS STRATEGY
Since its inception, the Company has developed and introduced products
incorporating a number of innovations in hardware-assisted simulation. 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. The key elements of this strategy
are the following:
Maintain Leadership in Mixed-Level, Hardware-Assisted Simulation Tools. The
Company intends to continue to invest significant resources to expand its set
of core technologies, including improvements in the Company's hardware and
software performance and greater IC modeling performance at the different
levels of design verification, and to enhance and support its products. The
Company also intends to continue to invest significant resources to enhance
its mixed level or co-simulation technology that provides for simultaneous
operation of software simulation at the behavioral level and hardware
acceleration at the gate level. In addition, the Company plans to develop new
products that will enable IC designers to simulate the higher density ICs
enabled by future generations of silicon process technology.
Target the Growing Universe of Designers of Complex ICs. The Company intends
to continue to market and sell its hardware-assisted simulation systems to the
increasingly diverse group of designers of complex ICs. The set of engineers
designing complex ICs has expanded to include electronic system designers and
designers working for fabless semiconductor companies and ASIC, full custom
and standard IC manufacturers. In addition, the Company believes that the
market for simulation of complex ICs is growing due to the increasing number
of complex ICs being designed and the wider use of deep submicron process
technology.
Conform to Industry Standards. The Company believes that its support of
industry standards allows system and IC designers to employ its products as an
integral part of the entire design process. The Company's systems accept
designs created in VHDL and Verilog-XL, the two most commonly used hardware
description languages. In addition, the Company's software utilizes the Motif
standard for graphical user interfaces and operates on the UNIX operating
system. The Company believes that its interface with commonly used design
environments facilitates the adoption and use of its products.
Develop Strategic Relationships with Key Accounts. 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 employs a technically-oriented sales force and applications
engineering team to serve the needs of existing and prospective customers. The
Company focuses on demonstrating the value of its hardware assisted solutions
to key customers in each segment. These key relationships serve as strong
references for the Company's products and help specify technical requirements
for future generations of the Company's tools.
Provide Comprehensive Cell Libraries and Library Development Tools. The
Company believes that IC cell libraries greatly facilitate ease of use and
accuracy of simulation systems and that the extensive libraries and library
development tools provided by the Company are a competitive advantage over
other simulation solutions. The Company has fostered relationships with IC
manufacturers such as American Microsystems, Inc., LSI Logic Corporation, VLSI
Technology, Inc., Toshiba, Texas Instruments Incorporated and NEC Corporation
in order to obtain the design specifications necessary for the development of
cell libraries and library development tools.
24
<PAGE>
PRODUCTS
IKOS markets high performance IC design simulation systems consisting of
hardware and software. In the IKOS system, critical simulation algorithms are
implemented in hardware to enhance performance. The software components of the
IKOS solution include behavioral-level simulation software, interfaces to
integrate the IKOS system with other EDA tools and cell libraries and library
development tools for modeling of ICs. IKOS simulation systems run on Sun
Microsystems, Inc. and Hewlett-Packard Company workstations.
The following is a description of the products offered by the Company:
Voyager VS. Voyager VS is the Company's VHDL software simulator. It provides
the behavioral simulation kernel and the design data management framework for
the remainder of the Voyager product series. Voyager VS fully complies with
the IEEE-1076 VHDL Language Reference Manual, and has an easy-to-use graphical
user interface and a powerful early stage design and debug tool. Both third
party and user-developed behavioral models are supported through flexible
interfaces to the simulation kernel, and user-programmable output formatting
allows Voyager VS to integrate with the in-house tools of IC vendors and high-
end customers.
Voyager CS. Voyager CS is a mixed-level (behavioral and gate-level) software
simulator that combines the functional simulation capabilities of Voyager VS
with a gate-level software simulator. This software simulator provides the
same simulation as the Company's hardware simulator by using the same gate
level algorithms and IC libraries utilized by the IKOS Nsim hardware simulator
family. By using Voyager CS, simulation problems due to library errors and
mismatches between simulation algorithms can be avoided. Voyager CS is also
used by IC vendors for library development. Voyager CS is designed to enable
an IC designer to transition easily from software-based simulation to
hardware-assisted simulation.
Voyager CSX. Voyager CSX links the Nsim accelerator to Voyager CS to enable
an IC designer to perform functional, gate-level or mixed-level hardware-
assisted simulation. The key technology behind Voyager CSX is embedded in the
IKOS SimLink, which allows multiple simulation engines to share the work in a
single simulation. SimLink manages the design partitioning between the
software and the hardware algorithms, and provides efficient time
synchronization and fast event exchange.
Voyager FS. The Company plans to begin production shipments in the fourth
quarter of calendar 1995 of the Voyager FS, the newest software product of its
Voyager product series. Voyager FS is a concurrent fault simulator that uses
the same libraries as Nsim and provides high-performance fault simulation,
using software. Fault simulation is used to verify the quality and
completeness of tests developed for the design once it is manufactured. The
Company believes that Voyager FS currently is the only product that allows the
same VHDL test patterns used by the design engineer for logic simulation to
also be used by the test engineer for fault simulation. Voyager FS runs on
standard workstations manufactured by Sun and Hewlett-Packard.
25
<PAGE>
THE IKOS VOYAGER ENVIRONMENT
[GRAPHIC DEPICTING THE IKOS VOYAGER ENVIRONMENT WITH
VOYAGER VS, VOYAGER CS AND VOYAGER FS INTERFACING WITH THE
NSIM SIMULATOR VIA SIMLINK APPEARS HERE]
26
<PAGE>
Gemini CSX. Customer shipments of Gemini CSX began in June of 1995. Gemini
CSX links Cadence's Verilog-XL software simulator with the IKOS Nsim simulator
to provide a mixed-level Verilog simulation system. Gemini CSX uses the IKOS
SimLink together with SimMatrix, developed by Precedence Incorporated
("Precedence"), to enable concurrent hardware-assisted gate-level simulation
by IKOS Nsim and software behavioral-level simulation by Cadence Verilog-XL.
The Company has been granted a license by Precedence to use, market and
distribute the SimMatrix interface in return for certain development fees and
royalties.
THE IKOS GEMINI ENVIRONMENT
[GRAPHIC DEPICTING GEMINI CSX LINKING VERILOG-XL
SOFTWARE SIMULATOR WITH IKOS' NSIM APPEARS HERE]
Nsim. This family of high performance special purpose computers is used with
Voyager CSX and Gemini CSX. Nsim computers incorporate proprietary algorithms
implemented in IKOS-designed ASICs under a massively parallel architecture to
accelerate gate-level simulation. The entry level Nsim4 supports functional
verification for IC designs with 300,000 gates and full-timing simulation for
deep sub-micron ICs with 50,000 to 75,000 gates of random logic. The next
member of the family, Nsim8, supports functional verification for IC designs
with 600,000 gates, and full-timing simulation for deep sub-micron ICs with
100,000 to 150,000 gates of random logic. The Nsim64 and Nsim256 are
expandable, multi-user accelerators that support functional verification for
20 million gate systems, and full-timing simulation for 4 to 5 million gates
of random logic. The Company has completed the design of the Nsim256
architecture but has not to date received an order for an Nsim256 system. The
Company anticipates that it will take up to nine months to complete
manufacture of the first Nsim256 system. The first Nsim shipped in June 1993
and there are approximately 150 Nsim simulators installed at over 50 customers
to date.
27
<PAGE>
Cell Libraries and Library Development Tools. IKOS promotes the use of its
simulation systems by providing library development tools that permit IKOS,
manufacturers and end-users to create and maintain current libraries. These
libraries provide the required functional and timing specifications of a
particular manufacturer's technology. The architecture of IKOS simulators was
specifically designed to facilitate the development of libraries. IKOS has
worked with IC manufacturers such as American Microsystems, Inc., LSI Logic
Corporation, VLSI Technology, Inc., Toshiba, Texas Instruments Incorporated and
NEC to enable customers to simulate complex designs using IKOS systems prior to
manufacture of the ICs by these IC vendors.
The following table provides a summary of IKOS product offerings:
<TABLE>
<CAPTION>
CALENDAR QUARTER OF FIRST
PRODUCT FAMILY PRODUCT KEY FEATURES SHIPMENT:
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Software
Simulators
Voyager VS VHDL Simulator Q3 1992
Voyager CS VHDL and Gate-Level Simulator Q2 1993
Voyager FS Concurrent Fault Simulator (1)
Voyager CSX VHDL Simulator with SimLink Q1 1993
Gemini CSX SimLink to Verilog-XL Q2 1995
- --------------------------------------------------------------------------------
Nsim
Hardware
Nsim4 Single-User 192K Primitives(2) Q2 1993
Nsim8 Single-User 448K Primitives Q2 1993
Nsim64 Multi-User/Expandable/up to
4M Primitives Q2 1993
Nsim256 Multi-User/Expandable/up to
16M Primitives (3)
- --------------------------------------------------------------------------------
</TABLE>
1 The Company plans commercial release of this product in the fourth quarter
of calendar 1995.
2 A single Nsim primitive will model 1.5 equivalent logic gates for
functional simulation and 1/3 to 1/4 gate for full-timing, submicron IC
simulation.
3 To date the Company has not received an order for this product.
U.S. list prices for the Company's software products currently range from
approximately $10,000 to $40,000 and for the Company's hardware family
currently range from approximately $80,000 to over $1.0 million.
28
<PAGE>
CUSTOMERS
IKOS sells its products to a broad range of companies including those in the
communications, semiconductor, multimedia/graphics, computer, aerospace and
consumer electronics industries. No customer accounted for over 10% of the
Company's net revenues in fiscal 1993. One customer, Motorola, Inc., and one
distributor, Itochu & Co., Ltd in Japan, accounted for 17.7% and 10.1%,
respectively, of the Company's net revenues in fiscal 1994. One distributor,
Itochu & Co., Ltd in Japan and one customer, S3 Incorporated, accounted for
15.3% and 11.5%, respectively, of the Company's net revenues for the first
nine months of fiscal 1995. A number of the Company's customers use IKOS
products for multiple applications. Certain of the Company's major customers
are listed below based upon the major application for which the Company
believes the customer is using the IKOS system.
COMMUNICATIONS MULTIMEDIA/GRAPHICS ASIC MANUFACTURERS
. ADC Telecommunications, Inc.
. ASCII Corporation . American Microsystems,
. Alcatel Nework Systems, Inc. Inc.
. Cirrus Logic, Inc.
. AT&T Corp. . Ikegami Electronics . Epson America, Inc.
. Cabletron Systems, Inc. . Oak Technology, Inc. . Mitsubishi Electronics
. CommQuest Technologies, Inc. America, Inc.
. S3 Incorporated
. Motorola, Inc. . Silicon Graphics, Inc. . SGS-Thomson
. Scientific Atlanta Inc. Microelectronics Inc.
. Siemens AG . Texas Instruments
. Tellabs Inc. Incorporated
COMPUTERS/PERIPHERALS AEROSPACE CONSUMER ELECTRONICS
. Acer, Inc. . Allen-Bradley Co. . Fuji-Xerox
. Advanced Micro Devices, Inc.
. Hughes Aircraft Co. . JVC America, Inc.
. Cyrix Corp. . Raytheon Co. . Sony America Corp.
. Hewlett-Packard Company . TRW Inc. . Toshiba America Inc.
. NEC Corporation
. Philips Semiconductors Inc.
SALES AND MARKETING
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. 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 Japan and in Central Europe through a wholly-owned German
subsidiary and sales offices in England, France and Japan. The sales process
is supported with a broad range of marketing programs which include trade
shows, direct marketing, public relations and advertising. From time to time
the Company may enter into joint marketing agreements with other EDA companies
and technology partners to increase market acceptance of the Company's
simulation systems.
International sales accounted for approximately 33.5% and 23.2% of the
Company's net revenues for the nine month periods ended July 1, 1995 and July
2, 1994, respectively, and 25.8%, 20.2% and 40.3% of the Company's net
revenues in fiscal 1994, 1993, and 1992, respectively. In addition to its
direct sales activities in foreign countries, the Company has developed
distributor relationships in Europe and Asia. The Company expects that
international sales will continue to account for a significant portion of its
revenues, and plans to continue to expand its international sales and
distribution channels. 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
29
<PAGE>
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.
Furthermore, there can be no assurance that the Company will be able to
continue to sell its systems internationally for United States currency.
International sales are subject to a number of other inherent risks. See "Risk
Factors--International Sales."
The Company provides hardware and software maintenance and support on a
contractual basis after the initial product warranty has expired. Hardware
support is provided on an on-site or on a return and repair basis. The Company
provides software support via a toll-free telephone line. Customers with
software maintenance coverage also receive regular software releases from the
Company. Foreign distributors generally provide customer training, service and
support for the products they sell.
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.
Certain key components used in the Company's products are presently
available from sole or limited sources. The inability to develop alternative
sources for these sole or limited source components or to obtain sufficient
quantities of these components could result in delays or reductions in product
shipments which could adversely affect the Company's operating results. The
Company's systems use proprietary ASICs that are currently manufactured by AMI
and subassemblies that are manufactured by Micron. The Company generally
purchases these components, including semiconductor memories used in the
Company's hardware simulators, pursuant to purchase orders placed from time to
time in the ordinary course of business and has no supply arrangements with
any of these source suppliers that require the suppliers to provide components
in guaranteed quantities or at set prices. Any prolonged inability to obtain
components or subassemblies in sufficient quantities or quality or on
favorable pricing or delivery terms, or any other circumstances that would
require the Company to seek alternative sources of supply, could have a
material adverse effect on the Company's operating results and could damage
the Company's relationships with its customers. See "Risk Factors--Dependence
Upon Certain Suppliers."
PRODUCT DEVELOPMENT
The Company's ongoing product development activities include: the
enhancement of current products, including the ability to simulate and verify
the design of higher gate count ICs and to offer a greater degree of
integration with EDA tools; the development of new product options and
features, including 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 30
engineers at July 1, 1995 of whom 24 were engaged principally in software
development. During the first nine months of fiscal 1995, the Company spent
approximately $3.0 million on research and development and during fiscal 1994,
1993 and 1992, the Company spent approximately $3.9 million, $7.9 million and
$2.6 million, respectively, on research and development. The Company's
research and development costs, including costs of software development before
technological feasibility, are expensed as incurred. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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
30
<PAGE>
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. 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.
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.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on patent, trademark, trade secret
and copyright law to protect its technology. The Company currently holds three
U.S. patents. However, there can be no assurance that any patent owned by the
Company will not be invalidated, circumvented or challenged, that the right
granted thereunder will provide competitive advantages to the Company or that
any of the Company's future patent applications, whether or not challenged by
applicable governmental patent examiners, will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around the patents owned by the Company. The Company generally enters
into confidentiality or license agreements with its employees, distributors
and customers, and limits access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. The
Company has also granted Racal a security interest in certain VHDL simulation
software jointly developed by the Company and Racal with respect to payment of
a promissory note to Racal by the Company with a current balance of $1.85
million. 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.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights.
Although the Company does not believe that its products infringe the
proprietary rights of any third parties, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted against the Company or that any
such assertions will not materially adversely affect the Company's business,
financial condition or results of operations. Irrespective of the validity or
the successful assertion of such claims, the Company could incur significant
costs with respect to the defense thereof which could have a material adverse
effect on the Company's business, financial condition or results of
operations. If any claims or actions are asserted against the Company, the
Company may seek to obtain a license under a third party's intellectual
31
<PAGE>
property rights. There can be no assurance, however, that under such
circumstances, a license would be available under reasonable terms or at all.
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. There can
be no assurance that these third party software licenses will continue to be
available to the Company on commercially reasonable terms or otherwise. The
loss of or inability to maintain any of these software licenses could result
in delays or reductions in product shipments until equivalent software could
be identified, licensed and integrated, which would adversely affect the
Company's operating results. In particular, the Company has a software license
agreement with Compass Design Automation, Inc. pursuant to which the Company
licenses certain VHDL tool integration software. This agreement is renewed
annually unless terminated by notice by either party. Loss of this license in
the near term could materially adversely affect the Company's operating
results. See "Risk Factors--Proprietary Rights."
EMPLOYEES
As of July 1, 1995 the Company employed a total of 125 persons, consisting
of 73 in marketing, sales and support, 9 in manufacturing, 30 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.
The Company's future performance depends in significant part upon attracting
and retaining key technical, sales, senior management and financial personnel.
Competition for such personnel is intense, and the inability to retain its key
personnel or to attract, assimilate or retain other highly qualified personnel
in the future on a timely basis could have a material adverse effect on the
Company's results of operations. See "Risk Factors--Dependence Upon Key
Personnel."
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.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, titles and ages as of July 1, 1995 of 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............................. 40 Chief Executive Officer, President
and Director
William B. Fazakerly....................... 46 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)....................... 54 Director
James R. Oyler (1)......................... 49 Director
Glenn E. Penisten (1)...................... 63 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 an 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 IKOS since October
1994. He had served as Vice President of Worldwide Sales since July 1993. Mr.
Nunez joined IKOS in April 1990 as Vice President of North American Sales
after five years in sales management with Zycad. Earlier he was branch sales
manager for Cadnetix (now part of Intergraph) in Southern California.
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, Vice President of Finance
and Administration, and Secretary since September 1986. Before joining the
Company, Mr. Rockom spent seventeen years at 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.
33
<PAGE>
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.
Before that, he was with Hewlett-Packard for four years as a production
engineer and circuit engineer.
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 for four years, by
Daisy Systems for one year, by Teradyne for four years, and by British
Aerospace for thirteen years.
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.
Before joining LeCroy Corporation he was President of U.S. Operations for
Racal 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 and Chief Executive Officer of Evans & Sutherland Computer
Corporation. Evans & Sutherland develops, manufactures and markets high
performance systems for various applications with demanding graphics
requirements. Prior to that, 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 that was an 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. From
1976 to 1982, Mr. Penisten served as Chief Executive Officer of AMI, a
semiconductor manufacturer.
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.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
The Company's 1995 Outside 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 by its stockholders in January 1996. A total of
100,000 shares of Common Stock has been reserved for issuance under the
Directors Plan. The Directors Plan provides for the grant of nonstatutory
stock options to nonemployee directors of the Company. The Directors Plan is
designed to work automatically without administration; however, to the extent
administration is necessary, it will be performed by the Board of Directors.
On the date of adoption of the Directors Plan, each nonemployee director of
the Company was automatically granted thereunder an option to
34
<PAGE>
purchase 10,000 shares of Common Stock, and the Directors Plan further
provides that each future nonemployee director of the Company will be granted
on the date on which the optionee first becomes a nonemployee director of the
Company an option to purchase 10,000 shares of Common Stock (the "Initial
Option"). On the date of each annual stockholders meeting, each nonemployee
director (other than a director who receives an Initial Option on such date)
is automatically granted an option to purchase 2,500 shares of Common Stock
(an "Annual Option"). A nonemployee director's first Annual Option is prorated
if the director was appointed to the Board of Directors subsequent to the
preceding annual stockholders meeting. Subject to an optionee's continuous
service with the Company, one fourth of an Initial Option will become vested
and exercisable on and after the day immediately preceding the date of the
first four annual stockholders meetings occurring after the date of grant of
the Initial Option. Annual Options will become vested and exercisable in full
on and after the day immediately preceding the date of the fourth annual
stockholders meeting occurring after the date of grant of the Annual Option,
subject to the optionee's continuous service. The exercise price per share of
all options granted under the Directors Plan shall be equal to the fair market
value of a share of the Company's Common Stock on the date of grant of the
option. Options granted under the Directors Plan have a term of ten years. The
number and class of shares subject to the Directors Plan, to outstanding
options, and to the automatic grant of options, and the exercise price of
outstanding options will be adjusted in the event of any stock dividend, stock
split, reverse stock split, recapitalization, combination, reclassification or
similar charge in the Company's capitalization. Options granted under the
Directors Plan are non-transferable.
The Directors Plan provides that, in the event of (i) a sale or exchange by
the stockholders of more than 50% of the Company's voting stock, (ii) a merger
or consolidation in which the Company is a party, (iii) the sale, exchange or
transfer of all or substantially all of the assets of the Company, or (iv) a
liquidation or dissolution of the Company wherein upon any such event, the
stockholders of the Company immediately before such event do not retain direct
or indirect beneficial ownership of at least 50% of the total combined voting
power of the voting stock of the Company, its successor, or the corporation to
which the assets of the Company were transferred, all options outstanding
under the Directors Plan will become immediately exercisable and fully vested.
In addition, the acquiring or successor corporation may assume or substitute
substantially equivalent options for the options outstanding under the
Directors Plan. To the extent that the options outstanding under the Directors
Plan are not assumed, substituted for, or exercised prior to such event, they
will terminate.
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table contains information as of July 1, 1995 regarding the
ownership of the Common Stock of the Company by all persons who, to the
knowledge of the Company, were (i) the beneficial owners of 5% or more of the
outstanding shares of Common Stock of the Company, (ii) each director of the
Company, and (iii) the Chief Executive Officer and the four other most highly
compensated executive officers of the Company as of October 1, 1994 whose
salary and bonus for the year ended October 1, 1994 exceeded $100,000 and (iv)
all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------
BENEFICIAL OWNER NUMBER PERCENT (1)(2)
- ---------------- -------------- ----------------
<S> <C> <C>
Gerald S. Casilli......................... 369,672(3) 6.4%
Ramon A. Nunez............................ 79,941(4) 1.4%
William B. Fazakerly...................... 173,923(5) 3.0%
Daniel R. Hafeman......................... 101,552(6) 1.8%
Lawrence A. Melling....................... 47,567(7) *
Lutz P. Henckels.......................... 22,782(8) *
James R. Oyler............................ 4,843(9) *
Glenn E. Penisten......................... 9,449(10) *
All Directors and Executive Officers as a
Group (12 persons)........................ 933,628(11) 15.2%
</TABLE>
- --------
* Represents less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable, or become exercisable within 60
days following July 1, 1995, are deemed outstanding. However, such shares
are not deemed outstanding for purposes of computing the percentage
ownership of any other person. All options held by the individuals named
in the table are immediately exercisable, subject to a right of repurchase
in favor of the Company for all exercised unvested shares. Unless
otherwise indicated in the footnotes to this table, the persons and
entitles named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable.
(3) Includes 103,352 shares subject to options exercisable within 60 days of
July 1, 1995. Does not include 2,000 shares held in the Thomas A. Casilli
Trust. Mr. Casilli serves as a trustee of the trust. Mr. Casilli disclaims
beneficial ownership of such shares.
(4) Includes 74,941 shares subject to options exercisable within 60 days of
July 1, 1995.
(5) Includes 119,590 shares subject to options exercisable within 60 days of
July 1, 1995. Does not include 1,250 shares held in each of the William B.
Fazakerly Trust and the Julie E. Fazakerly Trust. Mr. Fazakerly serves as
trustee of each of the trusts. Mr. Fazakerly disclaims beneficial
ownership of such shares.
(6) Includes 50,504 shares subject to options exercisable within 60 days of
July 1, 1995.
(7) Includes 44,591 shares subject to options exercisable within 60 days of
July 1, 1995.
(8) Includes 3,906 shares subject to options exercisable within 60 days of
July 1, 1995.
(9) Includes 4,843 shares subject to options exercisable within 60 days of
July 1, 1995.
(10) Includes 470 shares subject to options exercisable within 60 days of July
1, 1995. Does not include 4,489 shares held in the G. E. Penisten & N. L.
Penisten Revocable Trust dated February 24, 1984. Mr. Penisten disclaims
beneficial ownership of such shares.
(11) Includes 483,547 shares subject to options exercisable within 60 days of
July 1, 1995.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, $0.01 par value, and 10,000,000 shares of Preferred Stock, $0.01
par value (the "Preferred Stock").
COMMON STOCK
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Each holder of Common Stock is entitled to
one vote for each share held of record by him or her and does have cumulative
voting rights. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities and
there are no redemption or sinking fund provisions with respect to such
shares. All of the outstanding shares of Common Stock are, and the Common
Stock to be outstanding upon completion of this offering will be, fully paid
and non-assessable.
PREFERRED STOCK
The Company is authorized to issue a total of 10,000,000 shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number of shares to
be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereon. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of
the Preferred Stock, or any series thereof, unless a vote of any such holders
is required pursuant to the certificate or certificates establishing the
series of Preferred Stock. The Board of Directors of the Company has
designated 500,000 shares of the Company's Preferred Stock as Series G
Preferred Stock, $0.01 par value per share, (the "Series G Preferred Stock")
and has reserved such shares for issuance pursuant to the Company's Preferred
Stock Purchase Rights Plan. As of the date of this prospectus, the Board of
Directors of the Company has not authorized the issuance of any Preferred
Stock other than the shares of Preferred Stock issuable upon exercise of the
Preferred Stock Purchase Rights, as described below. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company without further action by the stockholders and may adversely affect
the market price of, and the voting and other rights of the holders of Common
Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS; PREFERRED STOCK PURCHASE RIGHTS
PLAN
The Company is a Delaware corporation and will be subject to Section 203 of
the Delaware General Corporation Law (the "Delaware Law"), an anti-takeover
law. In general, Section 203 of the Delaware Law prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in the Delaware Law) with a Delaware corporation for
three years following the date such person became an interested stockholder,
subject to certain exemptions such as the approval of the board of directors
and of the holders of at least two-thirds of the outstanding shares of voting
stock not owned by the interested stockholder. The existence of this provision
could have the effect of discouraging takeover attempts, including attempts
that might result in a premium over the market price for the shares of Common
Stock.
The Company's Certificate of Incorporation provides that any action required
or permitted to be taken by the stockholders of the Company may be taken only
at a duly called annual or special meeting of the stockholders and does not
provide for cumulative voting in the election of directors. The Certificate of
Incorporation and
37
<PAGE>
Bylaws restrict the right of stockholders to change the size of the Board of
Directors and to fill vacancies on the Board of Directors. The Bylaws also
established procedures, including advance notice procedures, with regard to
the nomination, other than by or at the direction of the Board of Directors,
of candidates for elections as directors or for stockholder proposal to be
submitted at stockholder meetings. The amendment of any of these provisions
would require approval by holders of 66.67% or more of the outstanding Common
Stock.
Under the Company's Preferred Stock Purchase Rights Plan, stockholders
receive one right to purchase one one-hundredth of a share of Series G
Preferred Stock for each outstanding share of the Company's Common Stock held
of record (the "Rights"). In general, the Rights become transferable and
exercisable to purchase one one-hundredth of a share of the Series G Preferred
Stock, at $10.00 per Right, when a person or group of affiliated persons (an
"Acquiring Person") acquires 20% or more of the Company's Common Stock or the
tenth day following the commencement of, or public announcement of an
intention to commence, a tender or exchange offer, without the approval of the
Board of Directors, the consummation of which would result in the beneficial
ownership of 20% or more of the Company's Common Stock. Each one one-hundredth
of a share of the new Preferred Stock has terms designed to make it
substantially the economic equivalent of one share of Common Stock. Prior to
an Acquiring Person acquiring 20% of the Company's Common Stock, and in
certain circumstances thereafter, the Rights can be redeemed for $.001 each by
action of the Board. Under certain circumstances, if an Acquiring Person
acquires 20% or more of the Common Stock of the Company, the Rights permit the
holders to purchase the Company's Common Stock at a 50% discount in lieu of
the Preferred Stock. In addition, in the event of certain business
combinations, the Rights permit purchase of the Common Stock of an acquirer at
a 50% discount. The Rights expire on February 10, 2002.
These and other provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
This may discourage another person or entity from making a tender offer for
the Company's Common Stock, including offers at a premium over the market
price of the Common Stock, and might result in a delay in changes in control
of management. In addition, these provisions could have the effect of making
it more difficult for proposal favored by the stockholders to be presented for
stockholder consideration.
The Company has also included in its Certificate of Incorporation provisions
to eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by the
Delaware Law and to indemnify its directors and officers to the fullest extend
permitted by Section 145 of the Delaware Law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
38
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Needham & Company, Inc. and Preferred
Technology, Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company, and the Company has agreed to
sell to each Underwriter, the aggregate number of shares of Common Stock set
forth opposite their respective names in the table below. The Underwriting
Agreement provides that the obligations of the Underwriters to pay for and
accept delivery of the shares of Common Stock are subject to certain
conditions precedent, and that the Underwriters are committed to purchase and
pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Needham & Company, Inc.......................................... 264,000
Preferred Technology, Inc....................................... 264,000
Bear, Stearns & Co. Inc. ....................................... 32,000
Hambrecht & Quist LLC........................................... 32,000
Lehman Brothers Inc............................................. 32,000
Oppenheimer & Co., Inc. ........................................ 32,000
Robertson, Stephens & Company, L.P. ............................ 32,000
Allen & Company Incorporated.................................... 20,000
William Blair & Company......................................... 20,000
J.C. Bradford & Co. ............................................ 20,000
Cowen & Company................................................. 20,000
Raymond James & Associates, Inc. ............................... 20,000
SoundView Financial Group, Inc. ................................ 20,000
Tucker Anthony Incorporated..................................... 20,000
Unterberg Harris, L.P. ......................................... 20,000
Wessels, Arnold & Henderson, L.L.C. ............................ 20,000
Black & Company, Inc. .......................................... 12,000
Branch, Cabell and Company...................................... 12,000
J.W. Charles Securities, Inc. .................................. 12,000
Cruttenden Roth Incorporated.................................... 12,000
D.A. Davidson & Co. Incorporated................................ 12,000
Dominick & Dominick Incorporated................................ 12,000
First Albany Corporation........................................ 12,000
Josephthal Lyons & Ross Incorporated............................ 12,000
Ragen McKenzie Incorporated..................................... 12,000
Rodman & Renshaw Inc. .......................................... 12,000
Van Kasper & Company............................................ 12,000
---------
Total......................................................... 1,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public
offering price per share set forth on the cover page of this Prospectus and to
certain dealers (who may include the Underwriters) at such price less a
concession not in excess of $0.32 per share. The Underwriters may allow, and
such dealers may reallow, a concession to certain other dealers (who may
include the Underwriters) not in excess of $0.10 per share. After the offering
to the public, the offering price and other selling terms may be changed by
the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 150,000 shares of Common Stock at the public offering price per
share, less the underwriting discounts and commissions, set forth on the cover
page of this Prospectus. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of
39
<PAGE>
the Common Stock offered hereby. To the extent the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock to be purchased by such
Underwriters, as shown in the above table, bears to the total shown.
In connection with this offering, certain of the Underwriters and selling
group members (if any) or their respective affiliates may engage in passive
market making transactions in the Common Stock of the Company in the Nasdaq
National Market immediately prior to the commencement of sales in this
offering, in accordance with Rule 10b-6A under the Exchange Act. Passive
market making consists of displaying bids in the Nasdaq National Market which
are limited by the bid prices of independent market makers and making
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are generally limited to a
specified percentage of the passive market maker's average daily trading
volume in the Company's Common Stock during a specified prior period and must
be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Common Stock of the Company at a level above
that which might otherwise prevail in the open market and, if commenced, may
be discontinued at any time.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with this offering, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), or to contribute payments that the
Underwriters may be required to make in respect thereof.
The Company and its directors and officers have agreed, without the prior
written consent of Needham & Company, Inc., not to, directly or indirectly,
sell, contract to sell, make any short sale, pledge, or otherwise dispose of,
any shares of Common Stock, options to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock of the
Company, for a period of 90 days after the effective date of the Registration
Statement to which this Prospectus relates, subject to certain limited
exceptions.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Gray Cary Ware & Freidenrich, A Professional Corporation, Palo
Alto, California. Pillsbury Madison & Sutro, San Francisco, California, are
acting as counsel for the Underwriters in connection with certain legal
matters relating to the Common Stock offered hereby.
EXPERTS
The consolidated financial statements of IKOS Systems, Inc. as of October 2,
1993, October 1, 1994 and July 1, 1995, and for each of the three years in the
period ended October 1, 1994 and for the nine months ended July 1, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with all
amendments and exhibits, referred to herein as the "Registration Statement")
under the Securities Act with respect to the shares being offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement, which may be obtained from the Commission
at its principal office in Washington,
40
<PAGE>
D.C. upon payment of the charges prescribed by the Commission. Statements
contained in this Prospectus or in any document incorporated herein by
reference as to the contents of any contract or document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the company of such contract or document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Reports, proxy statements and other information filed by
the Company with the Commission pursuant to the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, and at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material also can be obtained
from the Public Reference Branch of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-18623) are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the fiscal year ended October 1, 1994, (ii) the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 31, 1994, (iii) the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 1,
1995, and (iv) the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 1, 1995.
Any statement incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the foregoing documents incorporated by reference in this Prospectus. Requests
for such documents should be directed to IKOS Systems, Inc., 19050 Pruneridge
Avenue, Cupertino, California 95014, Attn: Joseph W. Rockom, telephone (408)
255-4567.
41
<PAGE>
IKOS SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<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 October 2, 1993, October 1, 1994 and July 1, 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended October 1, 1994 and for
the nine months ended July 1, 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 October 2, 1993, October 1, 1994 and July 1, 1995,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended October 1, 1994 and for the nine months
ended July 1, 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Jose, California
July 18, 1995
F-2
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1, JULY 1,
1993 1994 1995
---------- ---------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2,867 $ 3,422 $ 4,787
Short-term investments....................... 541 560 579
Accounts receivable (net of allowances for
doubtful accounts of $122).................. 2,815 4,884 6,258
Inventories.................................. 1,454 1,050 1,168
Prepaid expenses and other assets............ 64 222 206
-------- -------- --------
Total current assets..................... 7,741 10,138 12,998
Equipment and leasehold improvements.........
Office and evaluation equipment............ 2,076 2,576 2,724
Machinery and equipment.................... 4,448 4,664 4,924
Leasehold improvements..................... 232 267 267
-------- -------- --------
6,756 7,507 7,915
Less allowances for depreciation and
amortization............................ (4,910) (5,859) (6,344)
-------- -------- --------
1,846 1,648 1,571
Other assets................................. 1,219 343 112
-------- -------- --------
Total assets................................. $ 10,806 $ 12,129 $ 14,681
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 2,078 $ 1,909 $ 1,589
Accrued payroll and related expenses......... 658 786 779
Accrued commissions.......................... 293 650 533
Other accrued liabilities.................... 481 373 438
Deferred maintenance revenues................ 1,436 1,979 2,674
Current portion of long-term debt............ 990 591 825
-------- -------- --------
Total current liabilities................ 5,936 6,288 6,838
Long-term debt, less current portion......... 2,779 2,151 1,534
Accrued rent................................. 188 214 242
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000
shares authorized; none issued
and outstanding - - -
Common stock, $0.01 par value; 25,000
shares authorized; 5,431, 5,504 and
5,662 shares issued and outstanding,
respectively.............................. 54 55 57
Additional paid-in capital................. 25,893 25,960 26,498
Accumulated deficit........................ (24,044) (22,539) (20,488)
-------- -------- --------
Total stockholders' equity............... 1,903 3,476 6,067
-------- -------- --------
Total liabilities and stockholders' equity... $ 10,806 $ 12,129 $ 14,681
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
----------------------------------- -------------------
SEPTEMBER 26, OCTOBER 2, OCTOBER 1, JULY 2, JULY 1,
1992 1993 1994 1994 1995
------------- ---------- ---------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues
Product............... $11,004 $12,917 $17,886 $12,858 $16,683
Maintenance........... 2,938 3,611 3,750 2,707 3,500
------- ------- ------- ------- -------
Total net revenues.. 13,942 16,528 21,636 15,565 20,183
Cost of revenues
Product............... 3,274 5,542 5,000 3,781 4,313
Maintenance........... 719 789 930 678 820
------- ------- ------- ------- -------
Total cost of
revenues........... 3,993 6,331 5,930 4,459 5,133
------- ------- ------- ------- -------
Gross profit........ 9,949 10,197 15,706 11,106 15,050
Operating expenses:
Research and
development.......... 2,627 7,896 3,861 2,954 2,966
Sales and marketing... 8,879 9,303 9,447 6,575 8,353
General and
administration....... 1,807 1,873 1,596 1,166 1,576
------- ------- ------- ------- -------
Total operating
expenses........... 13,313 19,072 14,904 10,695 12,895
------- ------- ------- ------- -------
Income (loss) from
operations............. (3,364) (8,875) 802 411 2,155
Other income (expense):
Interest income....... 329 130 69 49 91
Interest expense...... - - (75) (44) (86)
Other................. - 48 140 87 87
------- ------- ------- ------- -------
Total other income.. 329 178 134 92 92
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes and extraordinary
credit................. (3,035) (8,697) 936 503 2,247
Provision for income
taxes.................. 72 53 95 - 196
------- ------- ------- ------- -------
Income (loss) before
extraordinary credit... (3,107) (8,750) 841 503 2,051
Extraordinary credit-
forgiveness of debt.... - - 664 664 -
------- ------- ------- ------- -------
Net income (loss)... $(3,107) $(8,750) $ 1,505 $ 1,167 $ 2,051
======= ======= ======= ======= =======
Per share:
Income (loss) before
extraordinary credit. $ (0.58) $ (1.62) $ 0.15 $ 0.09 $ 0.34
Extraordinary credit.. - - 0.12 0.12 -
------- ------- ------- ------- -------
Net income (loss)... $ (0.58) $ (1.62) $ 0.27 $ 0.21 $ 0.34
======= ======= ======= ======= =======
Common and common
equivalent shares used
in computing per share
amounts................ 5,379 5,415 5,651 5,659 6,025
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDERS' TOTAL
-------------- PAID-IN ACCUMULATED NOTES STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EQUITY
------ ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 28,
1991................... 5,337 $53 $25,779 $(12,187) $ - $13,645
Net issuance of stock
under employee benefit
plans.................. 69 1 72 - (8) 65
Repurchase of common
stock.................. (1) - - - - -
Net loss................ - - - (3,107) - (3,107)
----- --- ------- -------- --- -------
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.................. 158 2 538 - - 540
Net income.............. - - - 2,051 - 2,051
----- --- ------- -------- --- -------
Balance at July 1, 1995. 5,662 $57 $26,498 $(20,488) $ - $ 6,067
===== === ======= ======== === =======
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
----------------------------------- -------------------
SEPTEMBER 26, OCTOBER 2, OCTOBER 1, JULY 2, JULY 1,
1992 1993 1994 1994 1995
------------- ---------- ---------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)..... $(3,107) $(8,750) $ 1,505 $ 1,167 $ 2,051
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization....... 1,939 2,628 2,024 1,599 1,014
Gain (loss) on
retirement of
equipment.......... 27 6 (4) (4) 2
Accrued rent........ 16 172 26 20 28
License delivery and
technology transfer
in exchange for
debt............... - - (344) (324) -
Common stock/debt
issued for
technology
acquisition and the
write-off of
related assets - 3,600 - - -
Decrease of long-
term debt--
forgiveness of
note............... - - (750) (750) -
Changes in operating
assets and
liabilities:
Accounts receivable. (1,133) 1,756 (2,069) (1,626) (1,374)
Inventories......... 174 (506) 415 225 (74)
Prepaid expenses and
other current
assets............. (8) 20 (168) (60) 16
Other assets........ 82 (3) 12 15 (26)
Accounts payable.... 687 595 (169) (658) (320)
Accrued payroll and
related expenses... 63 80 128 (94) (7)
Accrued commissions. (43) (111) 357 (82) (117)
Other accrued
liabilities........ 93 17 (108) (112) 65
Deferred maintenance
revenues........... 352 (190) 543 363 695
------- ------- ------- ------- -------
Net cash provided
by (used in)
operating
activities....... (858) (686) 1,398 (321) 1,953
Investing activities:
Purchases of equipment
and leasehold
improvements......... (1,349) (1,037) (959) (590) (726)
Capitalized software
development costs.... (1,033) (513) - - -
Short-term
investments.......... 1,817 2,657 (19) (13) (19)
------- ------- ------- ------- -------
Net cash provided
by (used in)
investment
activities....... (565) 1,107 (978) (603) (745)
Financing activities:
Principal payments on
long-term borrowings. (180) (335) (683) (590) (383)
Borrowing under
promissory note...... - - 750 750 -
Sale of common stock.. 65 50 68 51 540
------- ------- ------- ------- -------
Net cash provided
by (used in)
financing
activities....... (115) (285) 135 211 157
------- ------- ------- ------- -------
Increase (decrease) in
cash and cash
equivalents............ (1,538) 136 555 (713) 1,365
Cash and cash
equivalents at
beginning of period.... 4,269 2,731 2,867 2,867 3,422
------- ------- ------- ------- -------
Cash and cash
equivalents at end of
period................. $ 2,731 $ 2,867 $ 3,422 $ 2,154 $ 4,787
======= ======= ======= ======= =======
Supplemental disclosures
of cash flow
information:
Cash paid for income
taxes................ $ 59 $ 59 $ 91 $ 59 $ 156
Cash paid for
interest............. $ - $ - $ 75 $ 44 $ 86
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 2, 1994 AND FOR THE NINE MONTHS ENDED JULY 2, 1994 IS
UNAUDITED)
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 26,
1992, October 2, 1993 and October 1, 1994 are the fiscal year-ends for 1992,
1993 and 1994, respectively. Fiscal year ended October 2, 1993 was a 53-week
fiscal year.
Interim financial information: The financial statements and related notes as
of July 2, 1994 and for the nine months ended July 2, 1994 are unaudited and
have been prepared on the same basis as the audited financial statements. The
unaudited financial statements and related notes include all adjustments
(consisting solely of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
results operations for the interim period.
The results of operations for the nine months ended July 1, 1995 are not
necessarily indicative of results for the full 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 July 1, 1995.
The following is a summary of held-to-maturity at July 1, 1995 securities
(in thousands):
<TABLE>
<CAPTION>
AMORTIZED
COST
---------
<S> <C>
U.S. Treasury Securities........................................ $100
U.S. Corporate Securities....................................... 479
----
$579
====
</TABLE>
F-7
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 2, 1994 AND FOR THE NINE MONTHS ENDED JULY 2, 1994 IS
UNAUDITED)
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>
OCTOBER 2, OCTOBER 1, JULY 1,
1993 1994 1995
---------- ---------- -------
<S> <C> <C> <C>
Raw materials.............................. $ 248 $ 259 $ 211
Work-in-process............................ 609 502 467
Finished goods............................. 597 289 490
------ ------ ------
$1,454 $1,050 $1,168
====== ====== ======
</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 1992 and 1993, the Company
capitalized $1,033,000 and $513,000, respectively. For fiscal 1994 and for the
nine months ended July 2, 1994 and July 1, 1995, 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
1992, 1993, and 1994 and for the nine months ended July 2, 1994 and July 1,
1995, the Company amortized $165,000, $662,000, $864,000, $684,000 and
$257,000, 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.
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 1992, 1993 and 1994 financial
statements have been reclassified to conform with the fiscal 1995
presentation.
F-8
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 2, 1994 AND FOR THE NINE MONTHS ENDED JULY 2, 1994 IS
UNAUDITED)
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1, JULY 1,
1993 1994 1995
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt obligation to Compass Design Automation
("Compass"). See note below................. $ 344 $ - $ -
Debt obligation to Racal-Redac, Inc. payable
in sixteen quarterly payments through 1998.. 3,425 2,100 1,850
Line of credit arrangement with leasing
company paid over 36 months and bearing
interest at 1.45% per month................. - 642 509
------ ------ ------
3,769 2,742 2,359
Less current portion......................... (990) (591) (825)
------ ------ ------
Long-term debt............................... $2,779 $2,151 $1,534
====== ====== ======
</TABLE>
Compass--In December 1993, a software licensing agreement was entered into
between Compass Design Automation ("Compass") and the Company whereby the
Company granted to Compass license rights to its Voyager VHDL simulator in
exchange for the Company's outstanding debt of $344,000.
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.
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 July 1, 1995 had an
outstanding balance of $509,000.
Total payments for all debt over the next four fiscal years are as follows
(in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR RACAL-REDAC EQUIPMENT LINE TOTAL
----------- ----------- -------------- ------
<S> <C> <C> <C>
1995 (remaining three months)............. $ 150 $ 58 $ 208
1996...................................... 600 231 831
1997...................................... 750 220 970
1998...................................... 350 - 350
------ ---- ------
Total................................... $1,850 $509 $2,359
====== ==== ======
</TABLE>
F-9
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 2, 1994 AND FOR THE NINE MONTHS ENDED JULY 2, 1994 IS
UNAUDITED)
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 eight 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 $48,000, $140,000 in fiscal 1993 and 1994, respectively, and
approximately $87,000 for both nine months ended July 2, 1994 and July 1,
1995. Future minimum rentals from subleases are approximately $103,000.
Rent expense approximated $451,000, $750,000, $763,000 in fiscal 1992, 1993
and 1994, respectively, and approximately $592,000 and $682,000 and for the
nine months ended July 2, 1994 and July 1, 1995, respectively.
Future minimum payments under non cancelable operating leases at July 1,
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1995 (remaining 3 months)......................................... $ 142
1996.............................................................. 599
1997.............................................................. 629
1998.............................................................. 659
1999.............................................................. 694
and thereafter.................................................... 731
------
$3,454
======
</TABLE>
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 28, 1991......... 563 $1,114 $0.350-$5.250
Granted............................. 357 1,457 3.000- 5.250
Exercised........................... (69) (73) 0.350- 3.500
Forfeitures......................... (51) (184) 0.350- 5.250
----- ------
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............................. 282 1,472 3.500- 9.250
Exercised........................... (158) (540) 0.350- 4.750
Forfeitures......................... (40) (191) 3.000- 7.500
----- ------
Balance at July 1, 1995............. 1,357 $5,192 $0.350-$9.250
===== ======
</TABLE>
F-10
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JULY 2, 1994 AND FOR THE NINE MONTHS ENDED JULY 2, 1994 IS
UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Exercisable options were approximately 442,000, 514,000 and 651,000 at
fiscal year end for 1992, 1993 and 1994, respectively, and approximately
936,000 at July 1, 1995.
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.
Under the 1988 Stock Option Plan, the Company has reserved 2,143,000 shares
for the granting of options of which approximately 2,052,000 shares were
granted, leaving approximately 91,000 shares available for grant at July 1,
1995. The Company has reserved 1,448,000 shares of common stock for future
issuance under the 1988 Stock Option Plan for outstanding options and options
available for grant at July 1, 1995.
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 January 1996. A total of 100,000 shares of Common Stock has
been reserved for issuance under the Directors Plan.
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 NINE MONTHS
----------------------------------- ENDED
SEPTEMBER 26, OCTOBER 2, OCTOBER 1, JULY 1,
1992 1993 1994 1995
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Current:
Federal.................... $ - $ - $ 7 $ 58
State...................... 14 7 3 43
Foreign.................... 58 46 85 95
--- --- --- ----
$72 $53 $95 $196
=== === === ====
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate (35% in 1995 and 1994; 34% in 1993 and 1992) follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS
----------------------------------- ENDED
SEPTEMBER 26, OCTOBER 2, OCTOBER 1, JULY 1,
1992 1993 1994 1995
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Tax provision (benefit) at
U.S. statutory rate....... $(1,032) $(2,957) $ 328 $ 787
Operating losses
(utilized), not utilized.. 1,032 2,957 (328) (787)
Alternative minimum tax.... - - 7 58
Foreign withholding tax.... 58 46 85 95
State taxes................ 14 7 3 43
------- ------- ----- -----
$ 72 $ 53 $ 95 $ 196
======= ======= ===== =====
</TABLE>
As of July 1, 1995 the Company had federal and state net operating loss
carryforwards of approximately $12,000,000 and $1,300,000, 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--(CONTINUED)
(INFORMATION AS OF JULY 2, 1994 AND FOR THE NINE MONTHS ENDED JULY 2, 1994 IS
UNAUDITED)
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 October 1, 1994 and July 1, 1995, are
as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 1, JULY 1,
1994 1995
---------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 5,000 $ 4,100
Research credits....................................... 1,200 1,200
Capitalized software................................... 2,800 1,700
Deferred revenue....................................... 733 1,000
Accrued expenses and reserves.......................... (233) 600
------- -------
Total deferred tax assets.............................. 9,500 8,600
Valuation allowance for deferred tax assets............ (9,500) (8,600)
------- -------
Net deferred tax assets................................ $ - $ -
======= =======
</TABLE>
The net valuation allowance decreased by $800,000 during the twelve months
ended October 1, 1994 and by $900,000 during the nine months ended July 1,
1995.
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.
Total international sales by geographic region are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS
----------------------------------- ENDED
SEPTEMBER 26, OCTOBER 2, OCTOBER 1, JULY 1,
1992 1993 1994 1995
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Far East..................... $1,717 $1,276 $2,511 $3,375
Europe....................... 3,841 1,801 3,008 3,378
Other........................ 58 253 64 -
------ ------ ------ ------
$5,616 $3,330 $5,583 $6,753
====== ====== ====== ======
</TABLE>
In fiscal 1992, two customers accounted for approximately 19% and 12% of net
revenues. In fiscal 1993, no customer accounted for more than 10% of net
revenues. In fiscal 1994, one customer and one distributor accounted for
approximately 18% and 10% of net revenues, respectively. For the nine months
ended July 1, 1995, one distributor and one customer accounted for 15% and 12%
of net revenues, respectively.
F-12
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN
OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 5
Use of Proceeds............................................................ 10
Price Range of Common Stock................................................ 10
Dividend Policy............................................................ 10
Capitalization............................................................. 11
Selected Consolidated Financial Data....................................... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 13
Business................................................................... 20
Management................................................................. 33
Principal Stockholders..................................................... 36
Description of Capital Stock............................................... 37
Underwriting............................................................... 39
Legal Matters.............................................................. 40
Experts.................................................................... 40
Available Information...................................................... 40
Incorporation of Certain Documents by Reference............................ 41
Index to Consolidated Financial Statements................................. F-1
</TABLE>
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1,000,000 Shares
[LOGO APPEARS HERE]
Common Stock
------------------
PROSPECTUS
------------------
Needham & Company, Inc.
Preferred Technology, Inc.
----------------
October 12, 1995
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