<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1995.
REGISTRATION NO. 33-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
IKOS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 77-0100318
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19050 PRUNERIDGE AVENUE, CUPERTINO, CALIFORNIA 95014
(408) 255-4567
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
RAMON A. NUNEZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IKOS SYSTEMS, INC.
19050 PRUNERIDGE AVENUE
CUPERTINO, CALIFORNIA 95014
(408) 255-4567
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
JAMES M. KOSHLAND, ESQ. STANTON D. WONG, ESQ.
KIRK O. WILLIAMS, ESQ. GABRIELLA A. LOMBARDI, ESQ.
GRAY CARY WARE & FREIDENRICH PILLSBURY MADISON & SUTRO
A PROFESSIONAL CORPORATION P.O. BOX 7880
400 HAMILTON AVENUE SAN FRANCISCO, CA 94120-7880
PALO ALTO, CA 94301
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the Registrant elects to deliver its annual report to security holders,
or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this
Form, check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
<TABLE>
<CAPTION>
=================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PRICE PER SHARE (2) PRICE FEE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($0.01 par
value).................. 1,437,500 shares $12.75 $18,328,125 $6,320
=================================================================================================
</TABLE>
(1) Includes 187,500 shares issuable upon exercise of an option granted to the
Underwriters to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of computing the
registration fee and based on the average of the high and low prices of
the Common Stock of IKOS Systems, Inc. as reported on the Nasdaq National
Market on September 7, 1995.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
IKOS SYSTEMS, INC.
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K Showing
Location in Prospectus of Items Required in Form S-2
<TABLE>
<CAPTION>
FORM S-2 ITEM LOCATION IN PROSPECTUS
------------- ----------------------
<C> <S> <C>
1. Forepart of the
Registration Statement
and Front Cover Page of
Prospectus.............. Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of
Prospectus.............. Inside Front and Outside Back Cover Pages;
Available Information; Incorporation of Certain
Documents by Reference
3. Summary Information,
Risk Factors and Ratio
of Earnings to Fixed
Charges................. Prospectus Summary; Risk Factors
4. Use of Proceeds......... Use of Proceeds
5. Determination of
Offering Price.......... Not Applicable
6. Dilution................ Not Applicable
7. Selling Security
Holders................. Principal and Selling Stockholders
8. Plan of Distribution.... Outside Front Cover Page; Underwriting
9. Description of
Securities to Be
Registered.............. Description of Capital Stock
10. Interests of Named
Experts and Counsel..... Not Applicable
11. Information with Respect
to the Registrant....... Front Cover Page; Prospectus Summary; Risk
Factors; Price Range of Common Stock;
Dividend Policy; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Principal and
Selling Stockholders; Description of Capital
Stock; Consolidated Financial Statements
12. Incorporation of Certain
Information by
Reference............... Incorporation of Certain Documents by Reference
13. Disclosure of Commission
Position on
Indemnification for
Securities Act
Liabilities............. Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1995
PROSPECTUS
----------
1,250,000 Shares
[LOGO OF IKOS SYTEMS]
Common Stock
-------------
All of the 1,250,000 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 September 7,
1995, the last reported sale price for the Common Stock, as reported on the
Nasdaq National Market, was $12.50 per share.
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
-------------
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.
<TABLE>
<CAPTION>
============================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
--------------------------------------------------------------------------------------------
Total (3)..................................... $ $ $
============================================================================================
</TABLE>
(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 and the Selling Stockholder have granted the Underwriters a 30-
day option to purchase up to an additional 187,500 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,
Proceeds to Company and Proceeds to Selling Stockholder will be $ , $ ,
$ and $ , respectively. The Company will not receive any proceeds from
the sale of shares by the Selling Stockholder. See "Principal and Selling
Stockholders" and "Underwriting."
-------------
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
, 1995.
-------------
Needham & Company, Inc. Preferred Technology, Inc.
The date of this Prospectus is , 1995.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
[PHOTO DEPICTING VOYAGER SERIES OF IKOS PRODUCTS INCLUDING VOYAGER VS, VOYAGER
CS, VOYAGER DSX AND NSIM APPEARS HERE. ALSO DEPICTED IS GEMINI CSX.]
Nsim is IKOS' second-generation
hardware accelerator with a
capacity of up to 4 million
primitives. It is a plug-in mixed-
level accelerator for Voyager and
Gemini that delivers speed,
capacity and ease of use.
The Voyager(R) Series of VHDL mixed- IKOS' LANGUAGE-BASED
level products includes Voyager VS, DESIGN VERIFICATION
a fully 1076-compliant VHDL and SOLUTIONS FOR ASIC
behavioral simulator with support AND SYSTEM DESIGNERS
for industry standard software and
hardware models; Voyager CS, a high-
performance 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-simulation
technologies from
IKOS and Precedence.
Gemini CSX provides a
transparent interface
between Cadence's
Verilog-XL
environment and Nsim,
IKOS' hardware
accelerator.
[LOGO OF IKOS SYSTEMS]
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.
<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....................... 1,250,000 shares
Common Stock outstanding after the
offering................................... 7,157,560 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 $20,469
Total assets..................................... 12,129 14,681 28,990
Long term debt, less current portion............. 2,151 1,534 1,534
Total stockholders' equity....................... 3,476 6,067 20,376
</TABLE>
--------
(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 1,250,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $12.50
per share 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 1,250,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$14,309,000 ($15,916,000 if the Underwriters' over-allotment option is
exercised in full), assuming a public offering price of $12.50 per share and
after deducting estimated underwriting discounts and commissions and 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.
The Selling Stockholder has granted the Underwriters an option to purchase
up to a maximum of 50,000 shares of Common Stock solely to cover over-
allotments, if any. The Company will not receive any proceeds from the sale of
shares by the Selling Stockholder. See "Principal and Selling Stockholders"
and "Underwriting."
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 September 7, 1995)....................... 13.125 8.875
</TABLE>
On September 7, 1995, the last reported sale price for the Common Stock, as
reported on the Nasdaq National Market, was $12.50 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 1,250,000 shares of Common Stock offered hereby at
an assumed public offering price of $12.50 per share, 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; 6,912,000 shares issued and
outstanding as adjusted (2)......................... 57 69
Additional paid-in capital............................. 26,498 40,795
Accumulated deficit.................................... (20,488) (20,488)
-------- --------
Total stockholders' equity........................... 6,067 20,376
-------- --------
Total capitalization............................... $ 7,601 $ 21,910
======== ========
</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
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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
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<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
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<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.
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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.
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<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
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<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.
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<PAGE>
PRINCIPAL AND SELLING 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
BEFORE THE OFFERING
-----------------------------------
BENEFICIAL OWNER NUMBER PERCENT (1)(2)
---------------- -------------- ----------------
<S> <C> <C>
Gerald S. Casilli......................... 292,208(3) 5.1%
Ramon A. Nunez............................ 79,941(4) 1.4%
William B. Fazakerly...................... 123,923(5) 2.2%
Daniel R. Hafeman......................... 86,552(6) 1.5%
Lawrence A. Melling....................... 37,567(7) *
Lutz P. Henckels.......................... 12,782(8) *
James R. Oyler............................ 4,843(9) *
Glenn E. Penisten......................... 9,449(10) *
All Directors and Executive Officers as a
Group (12 persons)........................ 744,923(11) 12.5%
</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 26,415 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. If the Underwriters' over-allotment
option is exercised in full, Mr. Casilli will sell 50,000 shares.
(4) Includes 74,941 shares subject to options exercisable within 60 days of
July 1, 1995.
(5) Includes 69,590 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 35,504 shares subject to options exercisable within 60 days of
July 1, 1995.
(7) Includes 34,591 shares subject to options exercisable within 60 days of
July 1, 1995.
(8) Includes 261 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 301,924 shares subject to options exercisable within 60 days of
July 1, 1995.
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<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
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<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..........................................
Preferred Technology, Inc.......................................
---------
Total......................................................... 1,250,000
=========
</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 $ 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 $ per share. After the
offering to the public, the offering price and other selling terms may be
changed by the Representatives.
The Company and the Selling Stockholder have 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 187,500 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 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 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.
39
<PAGE>
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company and the Selling Stockholder 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 expects
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, 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.
40
<PAGE>
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>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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, THE SELLING STOCKHOLDER 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 and Selling 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>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,250,000 Shares
[LOGO OF IKOS SYSTEMS]
Common Stock
------------------
PROSPECTUS
------------------
Needham & Company, Inc.
Preferred Technology, Inc.
----------------
, 1995
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses payable by the Company
in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimates except the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
TO BE PAID
BY THE
REGISTRANT
----------
<S> <C>
Securities and Exchange Commission registration fee........... $ 6,320
NASD filing fee............................................... 2,333
Nasdaq National Market additional shares listing application
fee........................................................... 17,500
Accounting fees and expenses.................................. 72,000
Printing expenses............................................. 75,000
Transfer agent and registrar fees and expenses................ 5,000
Blue Sky fees and expenses (including legal fees)............. 15,000
Legal fees and expenses....................................... 100,000
Miscellaneous expenses........................................ 6,847
--------
Total....................................................... $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("Delaware Law") permits
indemnification of officers, directors, and other corporate agents under
certain circumstances and subject to certain limitations. The Company's
Certificate of Incorporation and By-Laws provide that the Company shall
indemnify its directors, officers, employees, and agents to the full extent
permitted by Delaware Law, including in circumstances in which indemnification
is otherwise discretionary under Delaware law. In addition, the Company
entered into separate indemnification agreements with its directors and
officers which would require the Company, among other things, to indemnify
them against certain liabilities which may arise by reason of their status or
service (other than liabilities arising from willful misconduct of a culpable
nature) and to maintain directors' and officer's liability insurance, if
available on reasonable terms.
These indemnification provisions may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities
Act of 1933, as amended (the "Securities Act").
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Company and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company in which
indemnification is being sought nor is the Company aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement (draft dated September 7, 1995).
4.1 The Company's Certificate of Amendment of Certificate of Incorporation
filed May 5, 1994.
4.2 The Company's Certificate of Amendment of Certificate of Incorporation
filed April 24, 1995.
4.3 Rights Agreement dated as of January 27, 1992 between the Company and
Manufacturers Hanover Trust Company of California, Rights Agent.
(Incorporated by reference to Exhibit (C)1, in the Company's report on
Form 8-K filed February 10, 1992.)
5.1 Legal opinion of Gray Cary Ware & Freidenrich, A Professional
Corporation, counsel to the Registrant.
10.1 Lease Agreement for the Company's principal facility dated March 20,
1992, between Ames Avenue Associates and the Company, as amended.
(Incorporated by reference to Exhibit 10.1 of the Company's annual
report on Form 10-K for the fiscal year ending September 26, 1992.)
10.2 Form of Director and Officer Indemnity Agreement. (Incorporated by
reference to Exhibit 10.6 of the Company's registration statement on
Form S-1 effective July 25, 1990.)
10.3 Amended and Restated Non-Qualified Stock Option Agreement dated August
17, 1989, between the Company and Gerald S. Casilli. (Incorporated by
reference to Exhibit 10.7 of the Company's registration statement on
Form S-1 effective July 25, 1990.)
10.4 Amended and Restated Immediately Exerciseable Non-Qualified Stock
Option Agreement dated August 17, 1989, between the Company and Gerald
S. Casilli. (Incorporated by reference to Exhibit 10.8 of the
Company's registration statement on Form S-1 effective July 25, 1990.)
10.5 Amended and Restated Non-Qualified Stock Option Agreement dated August
17, 1989, between the Company and William B. Fazakerly. (Incorporated
by reference to Exhibit 10.9 of the Company's registration statement
on Form S-1 effective July 25, 1990.)
10.7 The Company's 1988 Stock Option Plan. (Incorporated by reference to
Exhibit 10.14 of the Company's registration statement on Form S-1
effective July 25, 1990.)
10.10 International Distributorship Agreement dated April 11, 1988 with C.
Itoh & Co., Ltd. (with certain confidential portions excised).
(Incorporated by reference to Exhibit 10.24 of the Company's
registration statement on Form S-1 effective July 25, 1990.)
10.11 OEM Software License Agreement between CAD Language Systems, Inc. and
IKOS Systems, Inc. dated June 22, 1989 and amendment dated September
1991. (Incorporated by reference to Exhibit 10.18 of the Company's
Annual Report on Form 10-K for the year ended September 28, 1991.)
10.12 Technology Transfer and Joint Development Agreement with Racal-Redac,
Inc. dated July 1, 1993 (with certain portions excised). (Incorporated
by reference to Exhibit 10.19 of the Company's quarterly report on
Form 10-Q for the quarter ended July 3, 1993.)
10.13 Settlement Agreement and Release dated March 31, 1994 between Racal-
Redac, Inc. and the Company.
10.14 Software License Agreement with Compass Design Automation dated
December 31, 1993. (Incorporated by reference to Exhibit 10.17 of the
Company's quarterly report on Form 10-Q for the quarter ended January
1, 1994.)
10.15 Agreement dated June 2, 1994, by and between the Company and Gerald S.
Casilli. (Incorporated by reference to Exhibit 10.17 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.16 Agreement dated June 2, 1994, by and between the Company and William
B. Fazakerly. (Incorporated by reference to Exhibit 10.18 of the
Company's quarterly report on Form 10-Q for the quarter ended July 2,
1994.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.17 Agreement dated June 2, 1994, by and between the Company and Daniel R.
Hafeman. (Incorporated by reference to Exhibit 10.19 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.18 Agreement dated June 2, 1994, by and between the Company and Stephen
McLaughlin. (Incorporated by reference to Exhibit 10.20 of the
Company's quarterly report on Form 10-Q for the quarter ended July 2,
1994.)
10.19 Agreement dated June 2, 1994, by and between the Company and Larry A.
Melling. (Incorporated by reference to Exhibit 10.21 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.20 Agreement dated June 2, 1994, by and between the Company and Ramon A.
Nunez. (Incorporated by reference to Exhibit 10.22 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.21 Agreement dated June 2, 1994, by and between the Company and Joseph W.
Rockom. (Incorporated by reference to Exhibit 10.23 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.22 The Company's 1995 Outside Directors Stock Option Plan.
10.23 Employment Agreement dated September 27, 1994 by and between the
Company and Ramon A. Nunez.
10.24 Development and OEM Agreement for Verilog/Ikos Co-simulation Interface
dated August 26, 1994 by and between the Company and Precedence
Incorporated.
11.1 Statement of Computation of Earnings per share.
23.1 Consent of Ernst & Young LLP, independent auditors (included as page
II-7).
23.2 Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1
hereto).
24.1 Power of Attorney (included as page II-6).
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act"), each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cupertino, State of California, on the 8th day of
September, 1995.
IKOS SYSTEMS, INC.
/s/ RAMON A. NUNEZ
By:__________________________________
Ramon A. Nunez
President and Chief Executive
Officer
II-5
<PAGE>
POWER OF ATTORNEY
Each of the officers and directors of IKOS Systems, Inc. whose signature
appears below hereby constitutes and appoints Ramon A. Nunez and Joseph W.
Rockom and each of them, their true and lawful attorneys and agents, with full
power of substitution, each with power to act alone, to sign and execute on
behalf of the undersigned any amendment or amendments to this Registration
Statement on Form S-2 or any other registration statements relating to the
same offering to be filed pursuant to Rule 462(b) under the Securities Act and
to perform any acts necessary in order to file such amendments or other
registration statements, and each of the undersigned does hereby ratify and
confirm all that said attorneys and agents, or their or his substitutes, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on September 8, 1995 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GERALD S. CASILLI Chairman of the Board September 8, 1995
____________________________________
Gerald S. Casilli
/s/ RAMON A. NUNEZ President, Chief Executive September 8, 1995
____________________________________ Officer and Director
Ramon A. Nunez
/s/ JOSEPH W. ROCKOM Vice President of Finance September 8, 1995
____________________________________ and
Joseph W. Rockom Administration, Chief
Financial Officer and
Secretary
/s/ JAMES R. OYLER Director September 8, 1995
____________________________________
James R. Oyler
/s/ LUTZ HENCKELS Director September 8, 1995
____________________________________
Lutz Henckels
Director September , 1995
____________________________________
Glenn E. Penisten
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to use our report dated July
18, 1995, in the Registration Statement (Form S-2) and related Prospectus of
IKOS Systems, Inc. for the registration of 1,437,500 shares of its common
stock.
We also consent to the incorporation by reference therein of our report with
respect to the financial statement schedules of IKOS Systems, Inc. for each of
the three years in the period ended October 1, 1994 included in the Annual
Report (Form 10-K) for fiscal 1994 filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
San Jose, California
September 6, 1995
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT TITLE NO.
------- ------------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement (draft dated September 7, 1995).
4.1 The Company's Certificate of Amendment of Certificate of
Incorporation filed May 5, 1994.
4.2 The Company's Certificate of Amendment of Certificate of
Incorporation filed April 24, 1995.
4.3 Rights Agreement dated as of January 27, 1992 between the
Company and Manufacturers Hanover Trust Company of California,
Rights Agent. (Incorporated by reference to Exhibit (C)1, in
the Company's report on Form 8-K filed February 10, 1992.)
5.1 Legal opinion of Gray Cary Ware & Freidenrich, A Professional
Corporation, counsel to the Registrant.
10.1 Lease Agreement for the Company's principal facility dated
March 20, 1992, between Ames Avenue Associates and the Company,
as amended. (Incorporated by reference to Exhibit 10.1 of the
Company's annual report on Form 10-K for the fiscal year ending
September 26, 1992.)
10.2 Form of Director and Officer Indemnity Agreement. (Incorporated
by reference to Exhibit 10.6 of the Company's registration
statement on Form S-1 effective July 25, 1990.)
10.3 Amended and Restated Non-Qualified Stock Option Agreement dated
August 17, 1989, between the Company and Gerald S. Casilli.
(Incorporated by reference to Exhibit 10.7 of the Company's
registration statement on Form S-1 effective July 25, 1990.)
10.4 Amended and Restated Immediately Exerciseable Non-Qualified
Stock Option Agreement dated August 17, 1989, between the
Company and Gerald S. Casilli. (Incorporated by reference to
Exhibit 10.8 of the Company's registration statement on Form S-
1 effective July 25, 1990.)
10.5 Amended and Restated Non-Qualified Stock Option Agreement dated
August 17, 1989, between the Company and William B. Fazakerly.
(Incorporated by reference to Exhibit 10.9 of the Company's
registration statement on Form S-1 effective July 25, 1990.)
10.7 The Company's 1988 Stock Option Plan. (Incorporated by
reference to Exhibit 10.14 of the Company's registration
statement on Form S-1 effective July 25, 1990.)
10.10 International Distributorship Agreement dated April 11, 1988
with C. Itoh & Co., Ltd. (with certain confidential portions
excised). (Incorporated by reference to Exhibit 10.24 of the
Company's registration statement on Form S-1 effective July 25,
1990.)
10.11 OEM Software License Agreement between CAD Language Systems,
Inc. and IKOS Systems, Inc. dated June 22, 1989 and amendment
dated September 1991. (Incorporated by reference to Exhibit
10.18 of the Company's Annual Report on Form 10-K for the year
ended September 28, 1991.)
10.12 Technology Transfer and Joint Development Agreement with Racal-
Redac, Inc. dated July 1, 1993 (with certain portions excised).
(Incorporated by reference to Exhibit 10.19 of the Company's
quarterly report on Form 10-Q for the quarter ended July 3,
1993.)
10.13 Settlement Agreement and Release dated March 31, 1994 between
Racal-Redac, Inc. and the Company.
10.14 Software License Agreement with Compass Design Automation dated
December 31, 1993. (Incorporated by reference to Exhibit 10.17
of the Company's quarterly report on Form 10-Q for the quarter
ended January 1, 1994.)
10.15 Agreement dated June 2, 1994, by and between the Company and
Gerald S. Casilli. (Incorporated by reference to Exhibit 10.17
of the Company's quarterly report on Form 10-Q for the quarter
ended July 2, 1994.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT TITLE NO.
------- ------------- ----
<C> <S> <C>
10.16 Agreement dated June 2, 1994, by and between the Company and
William B. Fazakerly. (Incorporated by reference to Exhibit
10.18 of the Company's quarterly report on Form 10-Q for the
quarter ended July 2, 1994.)
10.17 Agreement dated June 2, 1994, by and between the Company and
Daniel R. Hafeman. (Incorporated by reference to Exhibit 10.19
of the Company's quarterly report on Form 10-Q for the quarter
ended July 2, 1994.)
10.18 Agreement dated June 2, 1994, by and between the Company and
Stephen McLaughlin. (Incorporated by reference to Exhibit 10.20
of the Company's quarterly report on Form 10-Q for the quarter
ended July 2, 1994.)
10.19 Agreement dated June 2, 1994, by and between the Company and
Larry A. Melling. (Incorporated by reference to Exhibit 10.21
of the Company's quarterly report on Form 10-Q for the quarter
ended July 2, 1994.)
10.20 Agreement dated June 2, 1994, by and between the Company and
Ramon A. Nunez. (Incorporated by reference to Exhibit 10.22 of
the Company's quarterly report on Form 10-Q for the quarter
ended July 2, 1994.)
10.21 Agreement dated June 2, 1994, by and between the Company and
Joseph W. Rockom. (Incorporated by reference to Exhibit 10.23
of the Company's quarterly report on Form 10-Q for the quarter
ended July 2, 1994.)
10.22 The Company's 1995 Outside Directors Stock Option Plan.
10.23 Employment Agreement dated September 27, 1994 by and between
the Company and Ramon A. Nunez.
10.24 Development and OEM Agreement for Verilog/Ikos Co-simulation
Interface dated August 26, 1994 by and between the Company and
Precedence Incorporated.
11.1 Statement of Computation of Earnings per share.
23.1 Consent of Ernst & Young LLP, independent auditors (included as
page II-7).
23.2 Consent of Gray Cary Ware & Freidenrich (included in Exhibit
5.1 hereto).
24.1 Power of Attorney (included as page II-6).
</TABLE>
<PAGE>
Draft of 9/7/95
1,250,000 Shares*
IKOS SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 1995
NEEDHAM & COMPANY, INC.
PREFERRED TECHNOLOGY, INC.
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
400 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
IKOS Systems, Inc., a Delaware corporation (the "Company"), proposes
to sell 1,250,000 shares of Common Stock of the Company, $0.01 par value (the
"Common Stock"), to you and to the several other Underwriters named in Schedule
I hereto (collectively, the "Underwriters"), for whom you are acting as
representatives (the "Representatives"). The shares of Common Stock sold by the
Company are hereinafter called the "Company Shares." The Company and the
stockholder of the Company named in Schedule II hereto (the "Selling
Stockholder") have agreed to grant to you and the other Underwriters an option
(the "Option") to purchase up to an additional 187,500 shares of Common Stock
(the "Option Shares") on the terms and for the purposes set forth in Section
1(b). The Company Shares and the Option Shares are referred to collectively
herein as the "Shares."
The Company and the Selling Stockholder confirm as follows their
agreements with the Representatives and the several other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements herein
contained and subject to all the terms and conditions of this Agreement, (i) the
Company agrees to issue and sell an aggregate of 1,250,000 shares of Common
Stock to the several Underwriters, and (ii) each of the Underwriters, severally
and not jointly, agrees to purchase from the Company the respective number of
Company Shares set forth opposite that Underwriter's name in Schedule I hereto,
at the purchase price of $_____ for each Company Share.
(b) Subject to all the terms and conditions of this Agreement, the Company
and the Selling Stockholder, severally and not jointly, grant the Option to the
several Underwriters to purchase, severally and not jointly, up to the maximum
number of Option Shares set forth in Schedule II hereto at the same price per
share as the Underwriters shall pay for the Company Shares. The Option may be
exercised only to cover over-allotments
--------------
* Plus an option to purchase up to an additional 187,500 shares to cover
over-allotments.
1
<PAGE>
in the sale of the Company Shares by the Underwriters and may be exercised in
whole or in part at any time (but not more than once) on or before the 30th day
after the date of this Agreement upon written or telegraphic notice (the "Option
Shares Notice") by the Representatives to the Company and the Selling
Stockholder, no later than 12:00 noon, New York City time, at least two and no
more than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date"), setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company and the Selling Stockholder will sell to the
Underwriters the number of Option Shares set forth in the Option Shares Notice,
and each Underwriter will purchase such percentage of the Option Shares as is
equal to the percentage of the Company Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
2. Delivery and Payment. Delivery of the Company Shares shall be made to
the Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks payable in next-day funds to
the order of the Company at the offices of Gray Cary Ware & Freidenrich, 400
Hamilton Avenue, Palo Alto, California 94301-1825, at 7:00 a.m., San Francisco
time, on the third (or, if the purchase price set forth in Section 1(b) hereof
is determined after 4:30 p.m., Washington D.C. time, the fourth) business day
following the commencement of the offering contemplated by this Agreement, or at
such time on such other date, not later than seven business days after the date
of this Agreement, as may be agreed upon by the Company and the Representatives
(such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above with respect
to Option Shares sold by the Company, and by certified or official bank check
payable in next-day funds to the order of The First National Bank of Boston, as
custodian for the Selling Stockholder (the "Custodian"), with respect to Option
Shares sold by the Selling Stockholder) will take place at the offices specified
above for the Closing Date at the time and date (which may be the Closing Date)
specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as the Representatives shall
request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at least
24 hours prior to the Closing Date or the Option Closing Date, as the case may
be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Shares by the Company to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
Federal and state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the original issuance or sale to
such Underwriter of the Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 33-______) on Form S-2
relating to the Shares, including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A of the Rules and
Regulations included at any time as part of the registration statement. Copies
of such registration statement and amendments and of each related preliminary
prospectus have been delivered to the Representatives. If such registration
statement has not become effective, a further amendment to such registration
statement, including a form of final prospectus, necessary to permit such
registration statement to become effective will be filed promptly by the Company
with the Commission. If the
2
<PAGE>
registration statement has become effective, a final prospectus containing
information permitted to be omitted at the time of effectiveness by Rule 430A of
the Rules and Regulations will be filed promptly by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations. The
term "Registration Statement" means the registration statement as amended at the
time it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A and includes any registration statement relating to the offering
contemplated by this Agreement and filed pursuant to Rule 462(b) of the Rules
and Regulations. The term "Prospectus" means the prospectus as first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no
such filing is required, the form of final prospectus included in the
Registration Statement at the Effective Date.
(b) No order preventing or suspending the use of any preliminary prospectus
has been issued by the Commission. On the Effective Date, the date the
Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did and will comply with all applicable
provisions of the Act and the Rules and Regulations and will contain all
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement, the Prospectus or any such amendment or supplement did
or will contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not and will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges
that the statements set forth under the heading "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement.
(c) The Company is, and at the Closing Date and, if later, the Option
Closing Date will be, a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation. The Company has,
and at the Closing Date and, if later, the Option Closing Date will have, full
power and authority to conduct all the activities conducted by it, to own or
lease all the material assets owned by or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. The
Company is, and at the Closing Date and, if later, the Option Closing Date will
be, duly licensed or qualified to do business and in good standing as a foreign
corporation in all jurisdictions in which the nature of the activities conducted
by it or the character of the assets owned or leased by it makes such license or
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not materially and adversely affect the
Company or its business, properties, business prospects, condition (financial or
other) or results of operations. Except as disclosed in the Registration
Statement and Prospectus, the Company (i) does not own, and at the Closing Date
and, if later, the Option Closing Date will not own, directly or indirectly, any
shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any corporation, firm, partnership,
joint venture, association or other entity and (ii) is not, and at the Closing
Date and, if later, the Option Closing Date will not be, engaged in any
discussions or a party to any agreement or understanding, written or oral,
regarding the acquisition of an interest in any corporation, firm, partnership,
joint venture, association or other entity where such discussions, agreements or
understandings would require amendment to the Registration Statement pursuant to
applicable securities laws. Complete and correct copies of the certificate of
incorporation and of the by-laws of the Company and all amendments thereto have
been delivered to the Representatives, and no changes therein will be made
subsequent to the date hereof and prior to the Closing Date or, if later, the
Option Closing Date.
3
<PAGE>
(d) All of the outstanding shares of capital stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and were
issued in compliance with all applicable state and federal securities laws; the
Company Shares and the Option Shares issued by the Company (if any) have been
duly authorized and when issued and paid for as contemplated herein will be
validly issued, fully paid and nonassessable; no preemptive or similar rights
exist with respect to any of the Shares or the issue and sale thereof. The
description of the capital stock of the Company in the Registration Statement
and the Prospectus is, and at the Closing Date and, if later, the Option Closing
Date will be, complete and accurate in all respects. Except as set forth in the
Prospectus, the Company does not have outstanding, and at the Closing Date and,
if later, the Option Closing Date will not have outstanding, any options to
purchase, or any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
any shares of Common Stock, or any such warrants, convertible securities or
obligations.
(e) The financial statements and schedules included in the Registration
Statement or the Prospectus present fairly the financial condition of the
Company as of the respective dates thereof and the results of operations and
cash flows of the Company for the respective periods covered thereby, all in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the entire period involved, except as otherwise disclosed in
the Prospectus. No other financial statements or schedules of the Company are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. Ernst & Young LLP (the
"Accountants"), who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The summary financial and statistical data
included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the financial
statements presented therein.
(f) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus and prior to the Closing Date and,
if later, the Option Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company (other than in
connection with the exercise of options to purchase the Company's Common Stock
granted pursuant to the Company's stock option plan as described in the
Registration Statement), or any material adverse change in the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company, arising for any reason whatsoever, (ii) the Company
has not incurred nor will it incur, except in the ordinary course of business as
described in the Prospectus, any material liabilities or obligations, direct or
contingent, nor has it entered into nor will it enter into, except in the
ordinary course of business as described in the Prospectus, any material
transactions other than pursuant to this Agreement and the transactions referred
to herein and (iii) the Company has not and will not have paid or declared any
dividends or other distributions of any kind on any class of its capital stock.
(g) The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
(h) Except as set forth in the Registration Statement and the Prospectus,
there are no actions, suits or proceedings pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its officers in
their capacity as such, nor any basis therefor, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding would materially and adversely affect the Company or its business,
properties, business prospects, condition (financial or otherwise) or results of
operations.
(i) The Company has, and at the Closing Date and, if later, the Option
Closing Date will have, performed all its obligations required to be performed
by it, and is not, and at the Closing Date and, if later, the Option Closing
Date will not be, in default, under any contract or other instrument to which it
is a party or by which its property is bound or affected, which default might
materially and adversely affect the Company or its business, properties,
business prospects, condition (financial or other) or results of operations. To
the Company's best knowledge, no other party under any contract or other
instrument to which it is a party is in default in any respect thereunder, which
default would materially and adversely affect the Company or its business,
properties,
4
<PAGE>
business prospects, condition (financial or other) or results of operations.
The Company is not, and at the Closing Date and, if later, the Option Closing
Date will not be, in violation of any provision of its certificate of
incorporation or by-laws.
(j) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated herein,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase and distribution by the Underwriters of the
Shares to bc sold by the Company.
(k) The Company has full corporate power and authority to enter into this
Agreement. This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as to (i)
rights to indemnity and contribution hereunder which may be limited by
applicable law, (ii) bankruptcy and laws relating to the rights and remedies of
creditors generally and (iii) the availability of equitable remedies. The
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in the action or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under the certificate of incorporation or by-laws of the Company, any
indenture, mortgage, deed of trust, voting trust agreement, loan agreement,
bond, debenture, note agreement or other evidence of indebtedness, lease,
contract or other agreement or instrument to which the Company is a party or by
which the Company or any of its properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company presently in effect, a breach or violation of which, a
default under which, a termination of which, an acceleration under which, or a
conflict with which would materially and adversely affect the Company and its
business, properties, business prospects, condition (financial or other) or
results of operations.
(l) The Company has good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such liens, charges, encumbrances
or restrictions as are described in the Prospectus and those which, individually
and in the aggregate, are not material in amount or which, individually and in
the aggregate, do not adversely affect the use made or proposed to be made of
such properties and assets by the Company. The Company, as lessee, has valid,
subsisting and enforceable leases for the properties described in the Prospectus
as leased by it, except such as are described in the Prospectus or are not
material to the business of the Company. The agreements to which the Company is
a party described in the Prospectus are valid agreements, enforceable by the
Company (as applicable), except as the enforcement thereof may be limited by
bankruptcy and laws relating to the rights and remedies of creditors generally
or by the availability of general equitable remedies. The Company owns or
leases all such properties as are necessary to its operations as now conducted
or as proposed to be conducted, except where the failure to so own or lease
would not materially and adversely affect the Company or its business,
properties, business prospects, condition (financial or otherwise) or results of
operations.
(m) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company is a party have been duly
authorized, executed and delivered by the Company, constitute valid and binding
agreements of the Company and are enforceable against the Company in accordance
with the terms thereof, except as to (i) rights to indemnity and contribution
thereunder which may be limited by applicable law, (ii) bankruptcy and laws
relating to the rights and remedies of creditors generally and (iii) the
availability of equitable remedies.
(n) No statement, representation, warranty or covenant made by the Company
in this Agreement or made in any certificate or document required by Section
5(1) of this Agreement to be delivered to the Representatives was or will be,
when made, inaccurate, untrue or incorrect in any material manner.
5
<PAGE>
(o) Neither the Company nor any of its directors, officers or controlling
persons has taken, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result, under the Act or otherwise, in, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(p) No holder of securities of the Company has rights to the registration
of any securities of the Company because of the filing of the Registration
Statement, which rights have not been waived by the holder as of the date
hereof.
(q) The Common Stock is listed and duly admitted to trading on the Nasdaq
National Market (the "NNM"), and the Company has received notification that the
listing by the NNM of the Shares has been approved, subject to official notice
of issuance of the Shares.
(r) Except as disclosed in the Prospectus, (i) the Company has sufficient
trademarks, trade names, patent rights, mask works, copyrights, licenses,
approvals and governmental authorizations to conduct its business as now
conducted, where the failure to have any such right would have a material and
adverse effect on the Company or its business, properties, business prospects,
condition (financial or otherwise) or results of operations; (ii) the Company is
not infringing any mask works rights, copyrights, trade secrets or other similar
rights of others or, to the best knowledge of the Company, any trademarks, trade
name rights or patent rights of others, where such infringement would have a
material and adverse effect on the Company or its business, properties, business
prospects, condition (financial or otherwise) or results of operations; and
(iii) no claim has been made again the Company regarding trademark, trade name,
patent, mask work, copyright, license, trade secret or other infringement which
would have a material and adverse effect on the Company or its business,
properties, business prospects, condition (financial or otherwise) or results of
operations.
(s) The Company has filed all federal, state and foreign income tax returns
which have been required to be filed and has paid all taxes and assessments
received by it to the extent that such taxes or assessments have become due.
The Company has no tax deficiency which has been or might be asserted or
threatened against the Company which could have a material and adverse effect on
the Company or its business, properties, business prospects, condition
(financial or otherwise) or results of operations.
(t) The pro forma financial information set forth in the Registration
Statement reflects, subject to the limitations set forth in the Registration
Statement as to such pro forma financial information, the results of operations
of the Company purported to be shown thereby for the period indicated and
conforms to the requirements of Regulation S-X of the Rules and Regulations.
(u) The Company owns or possesses all authorizations, approvals, orders,
licenses, registrations, other certificates and permits of and from all
governmental regulatory officials and bodies necessary to conduct its business
as contemplated in the Prospectus, except where the failure to own or possess
all such authorizations, approvals, orders, licenses, registrations, other
certificates and permits would not materially and adversely affect the Company
or its business, properties, business prospects, condition (financial or
otherwise) or results of operations. There is no proceeding pending or
threatened, or any basis therefor known to the Company, which may cause any such
authorization, approval, order, license, registration, certificate or permit to
be revoked, withdrawn, canceled, suspended or not renewed; and the Company is
conducting its business in compliance with all laws, rules and regulations
applicable thereto, including, without limitation, all applicable local, state
and federal environmental laws and regulations.
(v) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
(w) The Company has not at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to disclose
fully any contribution in violation of law, or (ii) made any
6
<PAGE>
payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(x) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(y) The Company has complied in all respects with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), including the periodic reporting requirements
thereto, and each such filing has conformed in all respects to the requirements
of the Exchange Act and, as of its date, did not include any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(z) The Company has not since the filing of the Registration Statement,
except in connection with the sale of the Company Shares, (A) sold, bid for,
purchased, attempted to induce any person to purchase, or paid anyone any
compensation for soliciting purchases of, the Shares or (B) paid or agreed to
pay any person any compensation for soliciting another to purchase any other
securities of the Company.
4. Representations and Warranties of the Selling Stockholder. The
Selling Stockholder represents and warrants that:
(a) All consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Stockholder of this Agreement and the
Power-of-Attorney and Custody Agreement (the "Custody Agreement") hereinafter
referred to, and for the sale and delivery of the Option Shares to be sold by
such Selling Stockholder hereunder, have been obtained; and such Selling
Stockholder has full right, power and authority to enter into this Agreement and
the Custody Agreement and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Stockholder hereunder.
(b) This Agreement and the Custody Agreement have each been duly
authorized, executed and delivered by such Selling Stockholder and each such
document constitutes a valid and binding obligation of such Selling Stockholder,
enforceable in accordance with its terms.
(c) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the sale of the Option Shares by such Selling Stockholder or the
consummation by such Selling Stockholder of the transactions on its part
contemplated by this Agreement and the Custody Agreement, except such as have
been obtained under the Act or the Rules and Regulations and such as may be
required under state securities or Blue Sky laws or the by-laws and rules of the
NASD in connection with the purchase and distribution by the Underwriters of the
Shares to be sold by the Company.
(d) The sale of the Shares to be sold by such Selling Stockholder hereunder
and the performance by such Selling Stockholder of this Agreement and the
Custody Agreement and the consummation of the transactions contemplated hereby
and thereby will not result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder or any of
his properties is bound or affected, or violate or conflict with any judgment,
ruling, decree, order, statute, rule or regulation of any court or other
governmental agency or body applicable to the Selling Stockholder.
(e) Such Selling Stockholder has, and at the Closing Date and, if later,
the Option Closing Date, will have, good and valid title to the Option Shares to
be sold by such Selling Stockholder hereunder, free and clear
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of all liens, encumbrances, equities or claims; and, upon delivery of such
Option Shares and payment therefor pursuant hereto, good and valid title to such
Option Shares, free and clear of all liens, encumbrances, equities or claims,
will pass to each of the several Underwriters who have purchased such Shares in
good faith and without notice of any such lien, encumbrance, equity or claim or
any other adverse claim within the meaning of the Uniform Commercial Code.
(f) No offering, sale or other disposition of any shares of Common Stock
will be made within 90 days after the date of the Prospectus, directly or
indirectly, by such Selling Stockholder, otherwise than hereunder or with your
written consent.
(g) Such Selling Stockholder has not taken and will not at any time take,
directly or indirectly, any action designed, or which might reasonably be
expected, to cause or result in, or which will constitute, stabilization of the
price of shares of Common Stock to facilitate the sale or resale of any of the
Shares.
(h) To the extent that any statements or omissions made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto are made in reliance upon and in conformity with written
information furnished to the Company by such Selling Stockholder expressly for
use therein, such Preliminary Prospectus and the Registration Statement did, and
the Prospectus and any further amendments or supplements to the Registration
Statement and the Prospectus will, when they become effective or are filed with
the Commission, as the case may be, conform in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(i) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 3 hereof are
not true and correct.
In order to document the Underwriters' compliance with the reporting and
withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982
with respect to the transactions herein contemplated, the Selling Stockholder
agrees to deliver to you prior to or at the Closing Date a properly completed
and executed United States Treasury Department Form W-9 (or other applicable
form or statement specified by Treasury Department regulations in lieu thereof).
The Selling Stockholder represents and warrants that certificates in
negotiable form representing all of the Option Shares to be sold by such Selling
Stockholder have been placed in custody under the Custody Agreement, in the form
heretofore furnished to you, duly executed and delivered by such Selling
Stockholder to the Custodian, and that such Selling Stockholder has duly
executed and delivered a power-of-attorney, in the form heretofore furnished to
you (the Power-of-Attorney"), appointing Joseph W. Rockom, as such Selling
Stockholder's attorney-in-fact (the "Attorneys-in-Fact") with authority to
execute and deliver this Agreement on behalf of such Selling Stockholder, to
determine (subject to the provisions of the Custody Agreement) the purchase
price to be paid by the Underwriters to the Selling Stockholder as provided in
Section 2 hereof, to authorize the delivery of the Option Shares to be sold by
such Selling Stockholder hereunder and otherwise to act on behalf of such
Selling Stockholder in connection with the transactions contemplated by this
Agreement and the Custody Agreement.
The Selling Stockholder specifically agrees that the Option Shares
represented by the certificates held in custody for such Selling Stockholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by such Selling Stockholder for such
custody, and the appointment by such Selling Stockholder of the Attorney-in-
Fact by the Power-of-Attorney, are to that extent irrevocable. The Selling
Stockholder specifically agrees that the obligations of the Selling Stockholders
hereunder shall not be terminated by operation of law, whether by the death or
incapacity of the Selling Stockholder or by the occurrence of any other event.
If the Selling Stockholder should die or become incapacitated, or if any other
such event should occur, before the delivery of the Shares hereunder,
certificates representing the Option Shares shall be delivered by or on behalf
of the Selling Stockholder in accordance with the terms and conditions of this
Agreement
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and of the Custody Agreement, and actions taken by the Attorney-in-Fact
pursuant to the Power-of-Attorney shall be as valid as if such death,
incapacity, or other event had not occurred, regardless of whether or not the
Custodian, the Attorney-in-Fact, or any of them, shall have received notice of
such death, incapacity, or other event.
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representatives within a
reasonable period of time prior to the filing thereof and the Representatives
shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (1) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (2) of any request by the Commission for amendments or supplements to
the Registration Statement or the Prospectus or for additional information, (3)
of the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for that
purpose or the threat thereof, (4) of the happening of any event during the
period mentioned in the second sentence of Section 4(e) that makes any statement
made in the Registration Statement or the Prospectus untrue or that requires the
making of any changes in the Registration Statement or the Prospectus in order
to make the statements therein, in light of the circumstances in which they are
made, not misleading, and (5) of receipt by the Company or any representative or
attorney of the Company of any other communication from the Commission relating
to the Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will use its best efforts to comply with the provisions of, and make all
requisite filings with the Commission pursuant to, said Rule 430A and to notify
the Representatives promptly of all such filings.
(c) The Company will furnish to the Representatives, without charge, three
signed copies of the Registration Statement and of any post-effective amendment
thereto, including financial statements and schedules, and all exhibits thereto,
and will furnish to the Representatives, without charge, for transmittal to each
of the other Underwriters, a copy of the Registration Statement and any post-
effective amendment thereto, including financial statements and schedules, but
without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, but only for
the nine-month period referred to in Section 10(a)(3) of the Act, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies of such
supplement or amendment to the Prospectus as the Representatives may reasonably
request.
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(f) Prior to any public offering of the Shares, the Company will cooperate
with the Representatives and counsel to the Underwriters in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Representatives may
request; provided that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) During the period of five years commencing on the Effective Date, the
Company will furnish to the Representatives, and each other Underwriter who may
so request, copies of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally to the holders
of any class of its capital stock, and will furnish to the Representatives, and
each other Underwriter who may so request, a copy of each annual or other report
it shall be required to file with the Commission.
(h) The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for the applicable 12-month period after the Effective
Date, satisfying the provisions of Section 11(a) of the Act (including Rule 158
of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or reimburse
if paid by the Representatives, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to (i) the preparation,
printing and filing by the Company of the Registration Statement and exhibits to
it, each preliminary prospectus, Prospectus and any amendment or supplement to
the Registration Statement or Prospectus, (ii) the preparation and delivery of
certificates representing the Shares, (iii) the printing of this Agreement, the
Agreement Among Underwriters, any Dealer Agreements and any Underwriters'
Questionnaires, (iv) furnishing (including costs of shipping and mailing) such
copies of the Registration Statement, the Prospectus and any preliminary
prospectus, and all amendments and supplements thereto, as may be requested for
use in connection with the offering and sale of the Shares by the Underwriters
or by dealers to whom Shares may be sold, (v) the listing of the Shares on the
NNM, (vi) any filings required to be made by the Underwriters with the NASD, and
the fees, disbursements and other charges of counsel for the Underwriters in
connection therewith, (vii) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 5(f), including the fees, disbursements and other
charges of counsel to the Underwriters in connection therewith, and the
preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (viii) fees, disbursements and other charges to the Company (but not
those of counsel for the Underwriters, except as otherwise provided herein) and
(ix) the transfer agent for the Shares.
(j) If this Agreement shall be terminated by the Company pursuant to any of
the provisions hereof (otherwise than pursuant to Section 10 hereof) or if for
any reason the Company shall be unable to perform its obligations hereunder, the
Company will reimburse the several Underwriters for all reasonable out-of-pocket
expenses (including the fees, disbursements and other charges of counsel to the
Underwriters) reasonably incurred by them in connection herewith.
(k) The Company will not at any time, directly or indirectly, take any
action designed, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds," and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
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(m) During the period of 90 days commencing at the Closing Date, without
the prior written consent of Needham & Company, Inc. and other than pursuant to
the exercise of outstanding stock options or otherwise pursuant to the Company's
stock option, employee stock purchase or other stock plans disclosed in the
Prospectus, the Company will not issue, offer, sell, grant options to purchase
or otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable with its Common Stock or other
equity security.
(n) The Company will cause each of its officers and directors designated by
the Representatives to enter into lock-up agreements with the Representatives to
the effect that they will not, without the prior written consent of Needham &
Company, Inc., sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares according to the terms set forth
in Schedule III hereto.
6. Agreements of the Selling Stockholder. The Selling Stockholder agrees
to pay or cause to be paid all taxes, if any, on the transfer and sale of the
Option Shares and the fees and expenses of counsel and accountants retained by
the Selling Stockholder. The Company agrees with the Selling Stockholder to pay
all costs and expenses incident to the performance of the obligations of the
Selling Stockholder under this Agreement (except as set forth above), including,
but not limited to, all expenses incident to the delivery of the certificates
for the Option Shares, the costs and expenses incident to the preparation,
printing and filing of the Registration Statement (including all exhibits
thereto) and the Prospectus and any amendments or supplements thereto, the
expenses of qualifying the Option Shares under the state securities or Blue Sky
laws, all filing fees payable in connection with the review of the offering of
the Shares by the NASD, and the cost of furnishing to the Underwriters the
required copies of the Registration Statement and Prospectus and any amendments
or supplements thereto; provided that the Selling Stockholder agrees to pay or
cause to be paid his pro rata share (based on the percentage which the number of
Option Shares sold by such Selling Stockholder bears to the total number of
Shares sold) of all underwriting discounts and commissions.
7. Conditions of the Obligations of the Underwriters. The obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective shall
be received by the Representatives not later than 5:00 p.m., New York City time,
on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for the purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the staff of the Commission or such authorities and (iv)
after the date hereof no amendment or supplement to the Registration Statement
or the Prospectus shall have been filed unless a copy thereof was first
submitted to the Representatives and the Representatives do not object thereto
in good faith, and the Representatives shall have received certificates, dated
the Closing Date and the Option Closing Date and signed by the Chief Executive
Officer and the Chief Financial Officer of the Company (who may, as to
proceedings threatened, rely upon the best of their knowledge), to the effect of
clauses (i), (ii) and (iii) of this Section 5(b).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, in each case other than as described in or
contemplated by the Registration Statement and the Prospectus, and (ii) the
Company shall not have sustained any material loss or interference with its
business or properties from fire, explosion, flood, earthquake or other
casualty, whether or not covered by insurance, or from any labor dispute or any
court of legislative or other
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governmental action, order or decree, which is not described in the Registration
Statement and the Prospectus, if in the judgment of the Representatives any such
development makes it impracticable or inadvisable to consummate the sale and
delivery of the Shares by the Underwriters at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of its officers or
directors in their capacities as such, before or by any Federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding would materially and adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company.
(e) Each of the representations and warranties of the Company and the
Selling Stockholder contained herein shall be true and correct in all material
respects at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, and all covenants and agreements contained herein to be
performed on the part of the Company and all conditions contained herein to be
fulfilled or complied with by the Company or the Selling Stockholder at or prior
to the Closing Date and, with respect to the Option Shares, at or prior to the
Option Closing Date, shall have been duly performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, from Gray Cary Ware & Freidenrich, counsel to the Company and the
Selling Stockholder, covering the following matters (except that the matters set
forth in subparagraphs (xv) through (xviii) need not be addresssed in the
opinion delivered at the Closing Date, if different from the Option Closing
Date):
(i) the Company has been duly organized, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has the
corporate power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and is in
good standing in the State of California and each other jurisdiction in which
the conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so qualified or
be in good standing would not materially and adversely affect the Company or its
business, properties, financial condition or results of operations;
(ii) to such counsel's knowledge and except as disclosed in the
Registration Statement and Prospectus, the Company does not have any
subsidiaries or own or control any other corporation, association, or other
business entity;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus as
of the date therein; the shares of Common Stock outstanding prior to the
issuance of the Company Shares have been duly authorized and are validly issued,
fully paid and nonassessable, and have been issued pursuant to exemptions from
the registration and qualification requirements of federal and state securities
laws;
(v) the specimen certificate evidencing the Company Shares filed as
an exhibit to the Registration Statement is in due and proper form under
Delaware law, the Company Shares have been duly authorized and, when issued and
paid for in accordance with the terms of this Agreement, the Company Shares will
be validly issued, fully paid and nonassessable, and the issuance of such
Company Shares is not subject to any preemptive rights, or, to the best of such
counsel's knowledge, other rights to subscribe for or purchase securities;
(vi) the Registration Statement has become effective under the Act,
and, to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement or preventing the use of the Prospectus has been
issued and no proceedings for that purpose have been instituted or are pending
or contemplated
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by the Commission; any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in
the manner and within the time period required by such Rule 424(b);
(vii) the Registration Statement and the Prospectus and any
supplements or amendments thereto (except for financial statements, schedules
and financial information included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with the Act and
the rules and regulations of the Commission thereunder;
(viii) the Company has all requisite corporate power and authority to
enter into this Agreement and consummate the transactions contemplated hereby
and this Agreement has been duly authorized, executed and delivered by the
Company;
(ix) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement does not
contravene any provision of applicable law or the certificate of incorporation
or by-laws of the Company or any agreement or other instrument binding upon the
Company that is material to the Company or, to the best of such counsel's
knowledge, any judgment or decree of any governmental body, agency or court
having jurisdiction over the Company, presently in effect and a breach or
violation of which, a default under which, a termination of which, an
acceleration under which, or a conflict with which would materially and
adversely affect the Company or its business, properties, financial condition or
results of operations, and no consent, approval or authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may have been obtained under the Act and such as required by the securities
or Blue Sky laws of the various states in connection with the offer and sale of
the Shares by the Underwriters;
(x) the statements in the Prospectus under "Management--Executive
Officers and Directors" and "Description of Capital Stock" and in the
Registration Statement in Item 15, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to therein,
fairly present and summarize the information with respect to such legal matters,
documents and proceedings required under the Act and the Rules and Regulations;
(xi) to such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened to which the Company is a party or to which
any of the properties of the Company is subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described;
(xii) to such counsel's knowledge, no holder of securities of the
Company has rights, which have not been waived, to require the Company to
register with the Commission shares of Common Stock or other securities, as part
of the offering contemplated hereby;
(xiii) such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or Prospectus or any supplements or amendments
thereto which are not so filed, or described as required, and to such counsel's
knowledge, each description of such contracts and documents as is contained in
the Registration Statement and Prospectus fairly presents in all material
respects the information required under the Act and the Rules and Regulations;
(xiv) as of the Effective Date, the Shares were duly authorized for
listing on the NNM upon official notice of issuance; and
(xv) The Agreement and the Custody Agreement have each been duly
executed and delivered by or on behalf of the Selling Stockholder and the
Custody Agreement constitutes a valid and binding agreement of such Selling
Stockholder in accordance with its terms, except as enforceability may be
limited by the application of bankruptcy, insolvency or other laws affecting
creditors' rights generally or by general principles of equity; and the sale of
the Shares to be sold by such Selling Stockholder hereunder, the performance by
such Selling Stockholder of the Agreement and the Custody Agreement and the
consummation of the transactions contemplated hereby and thereby will not result
in a breach or violation of any of the terms or provisions of, or constitute a
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default under, or give any party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease, contract or
other agreement or instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder or any of its properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
Selling Stockholder.
(xvi) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required for
the consummation by the Selling Stockholder of the transactions on his part
contemplated by this Agreement, except such as have been obtained or made under
the Act or the Rules and Regulations and such as may be required under state
securities or Blue Sky laws or the by-laws and rules of the NASD in connection
with the purchase and distribution by the Underwriters of the Shares.
(xvii) To the best of such counsel's knowledge, at the Option Closing
Date such Selling Stockholder had good and valid title to the Option Shares to
be sold at the Option Closing Date by such Selling Stockholder under this
Agreement, free and clear of all liens, encumbrances, equities or claims and had
full right, power and authority to sell, assign, transfer and deliver the Option
Shares to be sold by such Selling Stockholder hereunder.
(xviii) Good and valid title to such Option Shares, free and clear of
any adverse claim, has been transferred to each of the several Underwriters who
have purchased such Option Shares in good faith and without notice of any other
adverse claim within the meaning of the Uniform Commercial Code.
In rendering the opinion in subparagraph (xvii) such counsel may rely upon
a certificate of the Selling Stockholder in respect of matters of fact as to
ownership of and liens, encumbrances, equities or claims on the Option Shares
sold by such Selling Stockholder, provided that such counsel shall state that
they believe that both you and they are justified in relying upon such
certificate.
Such counsel shall state its belief that, to its knowledge (except for
financial statements, schedules and financial information, as to which such
counsel need not express any belief) the Registration Statement and the
Prospectus, as amended, included therein at the time the Registration Statement
became effective did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading and the Prospectus, as amended or
supplemented, if applicable, does not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel may rely upon opinions of counsel
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, in which case, the opinion of counsel for the Company shall state
that it has no reason to believe that such counsel, the Representatives and
counsel for the Underwriters are not justified in so relying.
(g) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date, from
Pillsbury Madison & Sutro, counsel to the Underwriters, with respect to the
Registration Statement, the Prospectus and this Agreement, which opinion shall
be satisfactory in all respects to the Representatives.
(h) The Representatives shall have received on the Option Closing Date, a
certificate dated the Option Closing Date, signed by the Selling Stockholder (or
his attorneys-in-fact on his behalf) to the effect that the representations and
warranties of the Selling Stockholder contained herein are true and correct as
of such date.
(i) Concurrently with the execution and delivery of this Agreement, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company as required by the Act and the Rules and
Regulations and with respect to certain financial and
14
<PAGE>
other statistical and numerical information contained in the Registration
Statement. At the Closing Date, and, as to the Option Shares, the Option
Closing Date, the Accountants shall have furnished to the Representatives a
letter, dated the date of its delivery, which shall confirm, on the basis of a
review in accordance with the procedures set forth in the letter from the
Accountants, that nothing has come to their attention during the period from the
date of each letter referred to in the prior sentence to a date (specified in
each letter) not more than five days prior to the Closing Date and the Option
Closing Date, as the case may be, which would require any change in either
letter dated the date hereof if they were required to be dated and delivered at
the Closing Date and the Option Closing Date. Concurrently with the execution
and delivery of this Agreement, the Accountants shall have furnished to the
Representatives a report, addressed to the Representatives and in form and
substance satisfactory to the Representatives, as to their review of the
unaudited financial statements and pro forma financial statements contained in
the Registration Statement.
(j) Concurrently with the execution and delivery of this Agreement and at
the Closing Date and, with respect to the Option Shares, the Option Closing
Date, there shall be furnished to the Representatives a certificate, dated the
date of its delivery, signed by the Chief Executive Officer and the Chief
Financial Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, the Registration Statement and the Prospectus do not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading and (B) in the case of the certificate delivered at the Closing Date
and the Option Closing Date, since the Effective Date no event has occurred as a
result of which it is necessary to amend or supplement the Prospectus in order
to make the statements therein not untrue or misleading in any material respect.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct in all material respects.
(iii) Each of the covenants required to be performed by the Company
herein on or prior to the date of such certificate has been duly, timely and
fully performed and each condition herein required to be satisfied or fulfilled
on or prior to the date of such certificate has been duly, timely and fully
satisfied or fulfilled.
(k) The Representatives shall have received, on or prior to the Closing
Date, the executed agreements from the directors and officers as set forth on
Schedule III hereto referred to in Section 5(n).
(l) The Shares shall be qualified for sale in such jurisdictions as the
Representatives may reasonably request, and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
or the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been duly authorized
for listing on the NNM upon official notice of issuance.
(n) The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement in
the Registration Statement or the Prospectus, as to the accuracy at the Closing
Date and the Option Closing Date of the representations and warranties of the
Company herein, as to the performance by the Company of its obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representatives.
8. Indemnification.
(a) The Company and the Selling Stockholder, jointly and severally, will
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person, if any, who controls, within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Underwriter, from
15
<PAGE>
and against any and all losses, claims, liabilities, expenses and damages
(including any and all investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they, or any of them, may
become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, liabilities, expenses or damages (i) arise out of or are based on any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus, or the
omission or alleged omission to state in such document a material fact required
to be stated in it or necessary to make the statements in it not misleading in
light of the circumstances in which they were made, (ii) arise out of or are
based in whole or in part on any inaccuracy in the representations and
warranties of the Company or the Selling Stockholder contained herein or (iii)
arise out of or are based upon any failure of the Company or the Selling
Stockholder to perform its obligations hereunder or under law in connection with
the transactions contemplated hereby; provided that the Company and the Selling
Stockholder will not be liable to the extent that such loss, claim, liability,
expense or damage arises from the sale of the Shares in the public offering to
any person by an Underwriter and is based on an untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of any Underwriter, expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus, or any
amendment or supplement thereto; provided further that the Company and the
Selling Stockholder will not be liable to any Underwriter, the directors,
officers, employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased any of the
Shares from such Underwriter but was not sent or given a copy of the Prospectus
at or prior to the written confirmation of the sale of such Shares to such
person; and provided, further, that the Selling Stockholder shall only be liable
under this Section 8(a) for an amount not in excess of the product of the
purchase price for each Option Share set forth in Section 1(b) multiplied by the
number of Option Shares sold by the Selling Stockholder hereunder. The Company
and the Selling Stockholder acknowledge that the statements set forth under the
heading "Underwriting" in the preliminary prospectus and the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives on behalf of the Underwriters expressly
for inclusion in the Registration Statement, the preliminary prospectus or the
Prospectus. This indemnity will be in addition to any liability that the
Company and the Selling Stockholder might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company, each
person, if any, who controls, within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, the Company, and each director of the Company
and each officer of the Company who signs the Registration Statement and the
Selling Stockholder to the same extent as the foregoing indemnity from the
Company and the Selling Stockholder to each Underwriter, as set forth in Section
8(a), but only insofar as losses, claims, liabilities, expenses or damages arise
out of or are based on any untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives, on behalf of such Underwriter, expressly for use in the
Registration Statement, the preliminary prospectus or the Prospectus, or any
amendment or supplement thereto. The Company and the Selling Stockholder
acknowledge that the statements set forth under the heading "Underwriting" in
the preliminary prospectus and the Prospectus constitute the only information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of the Underwriters expressly for inclusion in the
Registration Statement, the preliminary prospectus or the Prospectus. This
indemnity will be in addition to any liability that each Underwriter might
otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section 8 shall, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 8, notify each such
indemnifying party in writing of the commencement of such action, enclosing with
such notice a copy of all papers served, but the omission so to notify such
indemnifying party will not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 8 unless,
and only to the extent that, such omission results in the loss of
16
<PAGE>
substantive rights or defenses by the indemnifying party. If any such action is
brought against any indemnified party and it notifies the indemnifying party of
its commencement, the indemnifying party will be entitled to participate in and,
to the extent that it elects by delivering written notice to the indemnified
party promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense, the indemnifying party will not be
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
there are legal defenses available to it or other indemnified parties that are
different from or in addition to those available to the indemnifying party,
(iii) the indemnified party has reasonably concluded that a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (iv) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. Any indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 8 is applicable in accordance with its terms, but for
any reason is held to be unavailable from the Company, the Selling Stockholder
or the Underwriters, the indemnifying party will contribute to the total losses,
claims, liabilities, expenses and damages (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted, but
after deducting any contribution received by the Company or the Selling
Stockholder from persons other than the Underwriters, such as persons who
control the Company within the meaning of the Act, officers of the Company who
signed the Registration Statement and directors of the Company, who also may be
liable for contribution) to which the Company, the Selling Stockholder and any
one or more of the Underwriters may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company and the
Selling Stockholder on the one hand and the Underwriters on the other hand. The
relative benefits received by the Company and the Selling Stockholder on the one
hand and the Underwriters on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholder bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. If, but
only if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such proportion
as is appropriate to reflect not only the relative benefits referred to in the
foregoing sentence, but also the relative fault of the Company and the Selling
Stockholder on the one hand and the Underwriters on the other hand with respect
to the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company, the Selling Stockholder or
the Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholder and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 8(d) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations
17
<PAGE>
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, liability, expense or damage, or action in respect
thereof, referred to above in this Section 8(d) shall be deemed to include, for
purposes of this Section 8(d), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8(d), no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts received by it and no person found guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 8(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 8(d), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against any such party in respect of which a claim for contribution may be made
under this Section 8(d), will notify any such party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 8(d). No party will be liable for contribution with respect to any
action or claim settled without its written consent (which consent will not be
unreasonably withheld).
(e) The indemnity and contribution agreements contained in this Section 8
and the representations and warranties of the Company and the Selling
Stockholder contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii)
any termination of this Agreement.
9. Reimbursement of Certain Expenses. In addition to their other
obligations under Section 8(a) of this Agreement, the Company and the Selling
Stockholder hereby severally agree to reimburse on a quarterly basis the
Underwriters for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon in whole or part, (i) as described
in Section 8(a), any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or the omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements in
it not misleading in light of the circumstances in which they were made, (ii)
any inaccuracy in the representations and warranties of the Company or the
Selling Stockholder contained herein or (iii) any failure of the Company to
perform its obligations hereunder or under law in connection with the
transactions contemplated hereby, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 7 and the possibility that such payment might later be held to be
improper; provided, however, that, to the extent any such payment is ultimately
held to be improper, the persons receiving such payments shall promptly refund
them.
10. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company from the Representatives, without liability on the part of
any Underwriter to the Company if, prior to delivery and payment for the Company
Shares or Option Shares, as the case may be, in the sole judgment of the
Representatives, (a) trading in any of the equity securities of the Company
shall have been suspended by the Commission, by an exchange that lists the
Shares or by the NNM, (b) trading in securities generally on the New York Stock
Exchange shall have been suspended or limited or minimum or maximum prices shall
have been generally established on such exchange, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchange or by
order of the Commission or any court or other governmental authority, (c) a
general banking moratorium shall have been declared by either Federal or New
York State authorities or (d) any material adverse change in the financial or
securities markets in the United States, or in political, financial or economic
conditions in the United States or any outbreak or material escalation of
hostilities or other calamity or crises, shall have occurred, the effect of
which is such as to make it, in the sole judgment of the Representatives,
impracticable to market the Shares.
18
<PAGE>
11. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase the Company Shares which it or they have agreed
to purchase hereunder, and the aggregate number of Company Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Company Shares, the other
Underwriters shall be obligated, severally, to purchase the Company Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Company Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Company Shares which all such non-defaulting Underwriters have so
agreed to purchase, or in such other proportions as the Representatives may
specify; provided that in no event shall the maximum number of Company Shares
which any Underwriter has become obligated to purchase pursuant to Section 1 be
increased pursuant to this Section 11 by more than one-ninth of such number of
Company Shares without the prior written consent of such Underwriter. If any
Underwriter or Underwriters shall fail or refuse to purchase any Company Shares
and the aggregate number of Company Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase exceeds one-tenth of the
aggregate number of the Company Shares and arrangements satisfactory to the
Representatives and the Company for the purchase of such Company Shares are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company for the
purchase or sale of any Shares under this Agreement. In any such case either
the Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Any action taken pursuant to
this Section 11 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
12. Miscellaneous. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the offices of the Company, 19050
Pruneridge Avenue, Cupertino, California 95014, Attention: Ramon A. Nunez,
President and Chief Executive Officer, with a copy to James M. Koshland, Esq.,
Gray Cary Ware & Freidenrich, 400 Hamilton Avenue, Palo Alto, California 94301,
or (b) if to the Underwriters, to the Representatives at the offices of Needham
& Company, Inc., 400 Park Avenue, New York, New York 10022, Attention:
Corporate Finance Department, with a copy to Stanton D. Wong, Esq., Pillsbury
Madison & Sutro, 235 Montgomery Street, San Francisco, California 94104. Any
such notice shall be effective only upon receipt. Any notice may be made by
telex or telephone, but if so made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, the Selling Stockholder and the controlling persons,
directors and officers referred to in Section 8, and their respective successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" as used in this
Agreement shall not include a purchaser, as such purchaser, of Shares from any
of the several Underwriters.
Any action required or permitted to be made by the Representatives under
this Agreement may be taken by them jointly or by Needham & Company, Inc.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
19
<PAGE>
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
Please confirm that the foregoing correctly sets forth the Agreement among
the Company and the several Underwriters.
Very truly yours,
IKOS SYSTEMS, INC.
By
-------------------------------------
Title
----------------------------------
SELLING STOCKHOLDER
By
-------------------------------------
Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
NEEDHAM & COMPANY, INC.
PREFERRED TECHNOLOGY, INC.
As Representatives of the several
Underwriters listed on Schedule I
By NEEDHAM & COMPANY, INC.
By
--------------------------------
Title
-----------------------------
20
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of
Company
Underwriters to be Purchased Shares
---------------------------- ---------
Needham & Company, Inc.................
Preferred Technology, Inc..............
_________
Total............................ 1,250,000
=========
21
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Total Number Total Number of
of Company Shares Option Shares
to be Sold to be Sold
----------------- ---------------
<S> <C> <C>
IKOS Systems, Inc.......... 1,250,000 137,500
Gerald S. Casilli.......... -- 50,000
--------- -------
TOTALS 1,250,000 187,500
========= =======
</TABLE>
22
<PAGE>
SCHEDULE III
FORM OF LOCK-UP AGREEMENT
AND DIRECTORS, OFFICERS AND STOCKHOLDERS
OF THE COMPANY WHO SHALL SIGN SUCH AGREEMENT
The undersigned is a holder of securities of IKOS Systems, Inc., a
California corporation (the "Company"), and wishes to facilitate the public
offering of shares of the Common Stock (the "Common Stock") of the Company (the
"Offering"). The undersigned recognizes that such Offering will be of benefit
to the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters in connection with the Offering, the undersigned hereby agrees that
he, she or it will not, without the prior written approval of Needham & Company,
Inc., acting on its own behalf and/or on behalf of other representatives of the
underwriters, 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 which he, she or it may own,
exclusive of any shares of Common Stock purchased in connection with the
Company's public offering or purchased in the public trading market, for a
period commencing as of the day on which the Form S-2 Registration Statement to
be filed on behalf of the Company in connection with the Offering (the
"Registration Statement") shall become effective by order of the Securities and
Exchange Commission (the "Effective Date") and ending on the date which is
ninety (90) days after the Effective Date; provided, however, that the foregoing
shall not prohibit any distribution by a partnership to its partners so long as
such partners agree to be bound by the terms of this Agreement. The undersigned
confirms that he, she or it understands that the underwriters and the Company
will rely upon the representations set forth in this Agreement in proceeding
with the Offering. The undersigned further confirms that the agreements of the
undersigned are irrevocable and shall be binding upon the undersigned's heirs,
legal representatives, successors and assigns. The undersigned agrees and
consents to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of securities held by the undersigned except in
compliance with this Agreement.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns upon the
effectiveness of the Registration Statement.
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
23
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE
OF AMENDMENT OF "IKOS SYSTEMS, INC.", FILED IN THIS OFFICE ON THE TWENTY-
FOURTH DAY OF APRIL, A.D. 1995, AT 4:30 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
[DELAWARE
STATE
SEAL
APPEARS HERE]
/s/ EDWARD J. FREEL
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
2230111 8100 AUTHENTICATION: 7483321
950090241 DATE: 04-24-95
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
IKOS SYSTEMS, INC.
Pursuant to Section 242 of Delaware General Corporation Law
The undersigned, Gerald S. Casilli, Chairman of the Board and Chief
Executive Officer of Ikos Systems, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Company"),
in accordance with the provisions of Section 242 thereof, DOES HEREBY CERTIFY:
1. That the amendment to the Company's Certificate of Incorporation
set forth below has been duly adopted by the Company's Board of Directors
and stockholders in accordance with the provisions of Section 242 of Delaware
General Corporation Law.
2. That Paragraph A of Article FOURTH of the Company's Certificate
of Incorporation is hereby amended to read in full as follows:
"A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is thirty-five million
(35,000,000) shares, consisting of:
"(1) ten million (10,000,000) shares of Preferred Stock, par
value one cent ($.01) per share (the "Preferred Stock");
and
"(2) twenty-five million (25,000,000) shares of Common Stock,
par value one cent ($.01) per share (the "Common Stock").
"At the effective time of this amendment of the Certificate of
Incorporation and without further action on the part of the corporation or
the holders of its stock, each share of Common Stock of the corporation
outstanding or held in the treasury immediately prior thereto shall be
changed and converted into 0.50 fully paid and nonassessable shares of
Common Stock of the Corporation, and at such time each holder of record of
Common Stock shall, without further action, be and become the holder of
0.50 shares of Common Stock for each share of Common Stock held of record
immediately prior thereto. In lieu of any fractional shares to which the
holder of Common Stock would otherwise be entitled, the corporation shall
pay cash equal to such fraction multiplied by the fair market value of one
share of Common Stock as determined by the Board of Directors of the
corporation."
IN WITNESS WHEREOF, Ikos Systems, Inc. has caused this certificate
to be signed by Gerald S. Casilli, its Chairman of the Board and Chief
Executive Officer, and attested by Joseph W. Rockom, its Assistant Secretary,
this 24th day of April, 1995.
IKOS SYSTEMS, INC.
By: /s/GERALD S. CASILLI
-------------------------------------
Gerald S. Casilli, Chairman of the
Board and Chief Executive Officer
ATTEST:
/s/JOSEPH W. ROCKOM
-------------------------------------
Joseph W. Rockom, Assistant Secretary
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE,
DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE
OF AMENDMENT OF "IKOS SYSTEMS, INC.", FILED IN THIS OFFICE ON THE FIFTH
DAY OF MAY, A.D. 1994, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/WILLIAM T. QUILLEN
[SEAL] --------------------------------------
William T. Quillen, Secretary of State
2230111 8100 AUTHENTICATION: 7111165
944079425 DATE: 05-05-94
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 05/05/1994
944079425 - 2230111
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
IKOS SYSTEMS, INC.
IKOS SYSTEMS, INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
The amendment to the Corporation's Certificate of Incorporation
set forth in the following resolutions approved by the Corporation's
Board of Directors and stockholders was duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of
the State of Delaware:
RESOLVED, that Paragraph A of Article FOURTH of the Corporation's
Certificate of Incorporation be amended and restated in its entirety
to read as follows:
"A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is thirty-five million
(35,000,000) shares, consisting of:
(1) ten million (10,000,000) shares of Preferred Stock,
par value one cent ($.01) per share (the "Preferred
Stock"); and
(2) twenty-five million (25,000,000) shares of Common
Stock, par value one cent ($.01) per share (the
"Common Stock")."
IN WITNESS WHEREOF, IKOS SYSTEMS, INC. has caused this certificate
to be signed by Gerald S. Casilli, its Chairman of the Board and Chief
Executive Officer, and attested by Joseph W. Rockom, its Assistant Secretary,
this 21 day of April 1994.
IKOS SYSTEMS, INC.
By: /s/GERALD S. CASILLI
--------------------------------------------
Gerald S. Casilli, Chairman of the Board and
Chief Executive Officer
ATTEST:
By: /s/JOSEPH W. ROCKOM
-------------------------------------
Joseph W. Rockom, Assistant Secretary
<PAGE>
[LETTERHEAD OF GRAY CARY WARE FREIDENRICH APPEARS HERE]
September 8, 1995
1090303-900000
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: IKOS Systems, Inc.
Registration Statement on Form S-2
Ladies & Gentlemen:
As counsel to IKOS Systems, Inc., a Delaware corporation (the "Company"),
we are rendering this opinion in connection with a proposed sale by the Company
of up to 1,437,500 shares of its common stock, par value $0.01 ("Common Stock")
pursuant to the Company's Registration Statement on Form S-2 filed with the
Securities and Exchange Commission on or about September 8, 1995 (the
"Registration Statement").
We have examined all instruments, documents, and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the 1,437,500 shares
of Common Stock to be issued and sold by the Company (of which up to 187,500
shares are to be issued to cover over-allotments, if any) are duly authorized
shares of Common Stock and, when issued against payment of the purchase price
therefor, will be validly issued, fully paid and nonassessable.
<PAGE>
Securities and Exchange Commission
September 8, 1995
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever it appears in the
Registration Statement, including the Prospectus constituting a part thereof, as
originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
<PAGE>
SETTLEMENT AGREEMENT AND RELEASE
--------------------------------
This Settlement Agreement and Release ("Agreement") is made and is
effective the 31st day of March, 1994 between Racal-Redac, Inc. ("Racal"),
a Massachusetts corporation with its principal place of business in Mahwah,
Mahwah, New Jersey, and IKOS Systems, Inc. ("IKOS"), a Delaware corporation,
with its principal place of business in Cupertino, California.
WHEREAS, on or about May 3, 1991, Racal and IKOS entered into a Technology
Transfer and Joint Development Agreement ("First Agreement"); and
WHEREAS, on or about July 1, 1993, Racal and IKOS entered into a Second
Technology Transfer and Joint Development Agreement ("Second Agreement"); and
WHEREAS, on or about March 24, 1994, IKOS filed a complaint for breach
of contract, intentional misrepresentation and declaratory relief against
Racal in the U.S. District Court, Northern District of California (San Jose
Branch), which case has been styled C-94 20204 PVT; and
WHEREAS, Racal denies IKOS' allegations, and
WHEREAS, Racal has asserted that IKOS is in breach of the Second
Agreement; and
WHEREAS, IKOS denies that it is in breach of the Second Agreement;
and
WHEREAS, the parties wish to resolve all disputes between them.
NOW THEREFORE, in consideration of the promises, agreements, releases,
and cash payments herein contained and described, and intending to be legally
bound.
Racal and IKOS agree as follows:
<PAGE>
1. Upon execution of this Agreement, IKOS will dismiss with prejudice,
the case of IKOS Systems, Inc. v Racal-Redac, Inc. C-94 20204 PVT. by filing
--------------------------------------
the Notice of Dismissal With Prejudice attached as Exhibit 1 hereto.
2. IKOS agrees to pay Racal the sum the Two and One-Half Million Dollars
($2,500,000) in accordance with the following payment schedule:
March 31, 1994 $175,000
April 1, 1994 $175,000
July 1, 1994 $ 50,000
October 1, 1994 $ 50,000
January 1, 1995 $100,000
April 1, 1995 $100,000
July 1, 1995 $150,000
October 1, 1995 $150,000
January 1, 1996 $150,000
April 1, 1996 $150,000
July 1, 1996 $150,000
October 1, 1996 $150,000
January 1, 1997 $150,000
April 1, 1997 $150,000
July 1, 1997 $300,000
October 1, 1997 $300,000
January 1, 1998 $ 50,000
2
<PAGE>
3. IKOS' obligation to pay the $2.5 million amount to Racal will be
evidenced by a promissory note, a copy of which is set forth as Exhibit
2 hereto. Upon execution of this Agreement, IKOS shall sign and provide
Racal two fully executed original copies of the promissory note attached
as Exhibit 2 hereto.
4. IKOS' obligation to pay the promissory note, attached as Exhibit
2 hereto, will be secured by the Security Agreement attached as Exhibit 3
hereto. Upon execution of the Settlement Agreement, IKOS shall sign and provide
Racal with two fully executed original copies of the Security Agreement attached
as Exhibit 3 hereto.
5. IKOS' payment obligations shall be secured by it giving Racal a
security interest in IKOS' fifty percent undivided ownership interest in the
VHDL 2000 software. That security interest is evidenced by the financing
statement attached as Exhibit 4 hereto. Upon execution of the Agreement, IKOS
shall sign and provide Racal with two fully-executed original copies of the
financing statement attached as Exhibit 4 hereto.
6. IKOS agrees to sign all other documents requested by Racal that will
permit Racal to perfect a security interest in IKOS' ownership interest in the
VHDL 2000 Software and all royalties, fees, payments and other revenues that
IKOS receives or is entitled to in connection with its ownership of the VHDL
2000 Software.
-3-
<PAGE>
7. IKOS does hereby remise and forever discharge Racal, its divisions,
affiliates, parents, past or present subsidiaries, officers, directors,
employees, agents, and all successors, assigns, heirs, and legal
representatives of such released entities and persons from any and all manner
of acts, causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, liabilities, judgements, executions,
claims, and demands of any nature whatsoever, known or unknown, choate or
inchoate, with respect to any matter from the beginning of time until the
date of which IKOS signs this Agreement.
8. Except for the obligations imposed on IKOS by this Agreement and
in the exhibits attached to this Agreement. Racal hereby releases IKOS, its
divisions, affiliates, parents, past or present subsidiaries, officers,
directors, employees, agents, and all successors, assigns, heirs, and legal
representatives of such released entities and persons from any and all manner
of acts, causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, liabilities, judgments, executions,
claims, and demands of any nature whatsoever, known or unknown, choate or
inchoate, with respect to any matter from the beginning of time until the
date on which Racal signs this Agreement.
9. Neither party shall take any action in any court to have the Agreement
set aside or declared illegal.
-4-
<PAGE>
10. IKOS and Racal agree to execute one copy of this Agreement by
telefax and to execute two copies of this Agreement by original signatures.
All obligations imposed upon IKOS under this Agreement and the exhibits
to this Agreement will become effective upon transmittal by telefax of the
signature of IKOS' authorized representative and attorney.
11. It is agreed by and between IKOS and Racal that all disputes and
matters whatsoever arising under, in connection with or incident to this
Agreement shall be litigated, if at all, in and before a Court located in
the State of New Jersey, to the exclusion of the Courts of any other state,
and that this Agreement shall be governed by and construed in accordance
with the laws of the State of New Jersey.
12. The rights and obligations of IKOS under this Agreement shall
not be assignable without the prior written consent of Racal. The rights
and obligations of Racal hereunder shall not be assignable without the written
consent of IKOS, except to any entity controlling, controlled by, or under
common control of Racal Electronics Plc. or The Racal Corporation. Subject
to the foregoing, the provisions of this Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors.
-5-
<PAGE>
WHEREFORE, Racal and IKOS have caused this Agreement to be signed by
their duly authorized representatives and their attorneys on the 7th day
of April, 1994.
IKOS SYSTEMS, INC. GRAY CARY WARE & FREIDENRICH
A Professional Corporation
By: /s/ Gerald S. Casilli
-----------------------
Title: Chairman & CEO By:
--------------------- ----------------------------
Date: 7 April 1994 Attorneys
--------------------- IKOS SYSTEMS, INC.
RACAL-REDAC, INC. EPSTEIN BECKER & GREEN, P.C.
By:
-----------------------
Title: By:
-------------------- ------------------------------
Date: Attorneys
--------------------- RACAL-REDAC, INC.
-6-
<PAGE>
GRAY CARY WARE & FREIDENRICH EXHIBIT 1
A Professional Corporation
400 Hamilton Avenue
Palo Alto, CA 94301-1825
Telephone: (315) 328-6581
(SAN JOSE BRANCH)
IKOS SYSTEMS, INC., a Delaware No. C-94 20204 PVT
corporation,
NOTICE OF DISMISSAL WITH
Plaintiff, PREJUDICE
v.
RACAL-REDAC, INC., A Massachusetts
corporation
Defendant
Plaintiff, IKOS Systems, Inc., hereby gives notice of and dismisses
the captioned case with prejudices.
DATED:
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
By:
--------------------------------
Attorneys for Plaintiff
IKOS SYSTEMS, INC.
<PAGE>
EXHIBIT Z
PROMISSORY NOTE
---------------
$2,500,000.00 Mahwah, New Jersey
Principal Amount March 31, 1994
----------------
FOR VALUE RECEIVED, the undersigned, IKOS Systems, Inc., a Delaware
corporation (the "Maker"), with its principal place of business in Cupertino,
California, hereby promises to pay to the order of Racal-Redac, Inc., a
Massachusetts corporation with its principal place of business in Mahwah,
New Jersey ("Payee"), the principal sum of Two Million, Five Hundred Thousand
Dollars and Zero cents ($2,500,000.00) in accordance with this promissory
note (the "Promissory Note").
1. The Principal Amount outstanding from time to time under this
Promissory Note is payable in lawful money of the United States of America
in same day funds.
2. The Principal Amount shall be due and payable in seventeen (17)
payments commencing on March 31, 1994, with the following due dates:
(1) March 31, 1994: $175,000.00
(2) April 1, 1994: $175,000.00
(3) July 1, 1994: $ 50,000.00
(4) October 1, 1994: $ 50,000.00
(5) January 1, 1995: $100,000.00
(6) April 1, 1995: $100,000.00
(7) July 1, 1995: $150,000.00
(8) October 1, 1995: $150,000.00
(9) January 1, 1996: $150,000.00
(10) April 1, 1996: $150,000.00
(11) July 1, 1996: $150,000.00
(12) October 1, 1996: $150,000.00
(13) January 1, 1997: $150,000.00
(14) April 1, 1997: $150,000.00
(15) July 1, 1997: $300,000.00
(16) October 1, 1997: $300,000.00
(17) January 1, 1998: $ 50,000.00
1
<PAGE>
3. DEFAULT: For purposes of this Promissory Note, a "Default" shall
be defined as:
I. The failure by Maker to pay any Principal Amount or
other amount accruing under this Promissory Note within ten (10) days of
the date such payment is due;
II. Any warranty, representation or other statement of
Maker contained in the Security Agreement, dated as of the date hereof,
which is incorporated herein by reference (the "Security Agreement"), that
is false or misleading in any material respect, or there is otherwise an
event of default as defined in the Security Agreement;
III. The institution of bankruptcy or similar proceedings
having the same effect, either voluntary or involuntary, under any state
or federal statute, by or against Maker.
iv. An assignment for the benefit of creditors by Maker;
v. Failure to perform or observe any other covenants,
agreements or conditions prescribed in this Promissory Note or the Security
Agreement and the continuance thereof for a period of ten (10) days; or
vi. Any attempted transfer or transfer of any portion
of IKOS' ownership interest in the VHDL 2000 Software.
4. ACCELERATION: Upon the occurrence of a Default, this Promissory
Note will accelerate and all amounts previously not paid will become due
and payable immediately to Payee along with interest on such amount at the
rate of ten percent (10%), per annum, compounded daily, or the maximum
percentage allowed by law. The rights and remedies available to Payee under
this Promissory Note shall be cumulative and in addition to any other rights
or remedies that Payee may be entitled to pursue at law or in equity. Further,
the exercise of one or more of such rights or remedies shall not impair
Payee's right to exercise any other right or remedy at law or in equity.
Notwithstanding the occurrence of a Default and/or Payee's exercise of
any of its rights or remedies hereunder, until such time as Payee receives
payment of all amounts due hereunder, interest will continue to accrue on
the outstanding principal balance in the amount of ten percent (10%), per
annum, compounded daily, or the maximum percentage allowed by law.
5. CONFESSION OF JUDGMENT: Upon the occurrence of a Default, Maker
appoints Payee as its Attorney-In-Fact with the power to execute a confession
of judgment.
6. ATTORNEYS FEES AND COSTS: Maker shall pay on demand any and all
costs and expenses, including reasonable attorneys' fees, incurred by Payee
in connection with a Default and the collection of any outstanding principal
and interest accrued hereunder to enforce the terms hereof. Maker hereby
waives trial by jury and, to the full extent permitted by law all rights
to plead any statute of limitation as a defense to any action hereunder.
2
<PAGE>
7. WAIVER: The waiver of a Default shall not constitute a continuing
waiver or a waiver of any subsequent Default. Maker hereby waives presentment,
demand, notice of demand, protest, notice of protest, notice of dishonor
and notice of nonpayment.
8. NOTICE: All notices, requests, consents and other communications
hereunder shall be in writing, and shall be deemed to have been duly given
on the date of delivery if delivered in person to the party named below,
or three (3) days after mailing if deposited in the United States mail,
first class, registered or certified mail, return receipt requested, with
postage prepaid as follows:
If to Maker: Racal-Redac, Inc.
c/o The Racal Corporation
Law Department
1601 N. Harrison Parkway
Sunrise, Florida 33323-2899
Attn: L. Rodney Manning
If to Payee: IKOS Systems, Inc.
19050 Pruneridge Avenue
Cupertino, California 95014
Attn: Gerald S. Casilli
or such other persons or addresses as either party may from time to time
designate by notice given to the other party in accordance with this Section
7. All payments made by Maker hereunder shall be made to Payee at the address
set forth above or as otherwise designated by Payee in accordance with this
Section 7.
9. This Promissory Note shall be governed by and construed in accordance
with the laws of the State of New Jersey.
10. Maker shall not have the right to assign this Promissory Note without
the prior written consent of Payee. Payee shall not have the right to assign
this Promissory Note without the prior written consent of Maker, provided,
however, that Payee may assign this Promissory Note to Payee's affiliates,
without the prior written consent of Maker, subject to all defenses.
11. This Promissory Note is issued pursuant to the Settlement Agreement
and Release between the Maker, and the Payee, and is secured by the security
interest described therein. Further, this Promissory Note incorporates herein
by reference the terms and conditions of the Security Agreement, which Security
Agreement grant a security interest to Payee in certain property as provided
in the Security Agreement. The Security Agreement, among other things, contains
provisions for acceleration of the maturity of this Promissory Note upon
the happening of certain stated events.
12. Any Default hereunder shall constitute a Default under the Security
Agreement, and any Default under the Security Agreement shall constitute
a Default hereunder.
3
<PAGE>
13. FORUM SELECTION: It is agreed by and between Debtor and Maker
that all disputes and matters whatsoever arising under, in connection with
or incident to this Promissory Note shall be litigated, if at all, in and
before a Court located in the State of New Jersey, to the exclusion of the
Courts of any other state.
IKOS SYSTEMS, INC.
By: /s/ Gerald S. Casilli
---------------------
Title: Chairman & CEO
---------------------
Date: 7 April 1994
---------------------
4
<PAGE>
EXHIBIT 3
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT (the "Agreement") is made and entered into
as of March 31, 1994, between IKOS Systems, Inc. ("Debtor"), a Delaware
corporation, with its principal place of business in Cupertino, California,
and Racal-Redac Corporation, a Massachusetts corporation with its principal
place of business in Mahwah, New Jersey ("Secured Party").
RECITALS
--------
A. Debtor owes Two Million and Five Hundred Thousand Dollars
($2,500,000) (the "Debt") to Secured Party evidenced by a Promissory Note
(the "Promissory Note") issued pursuant to the Settlement and Release Agreement
between Debtor and Secured Party, dated March 31, 1994.
B. To induce Secured Party to issue the Promissory Note to Debtor
upon the terms and conditions set forth in the Promissory Note, and as security
for the payment and performance of Debtor's obligations to Secured Party
under the Promissory Note, it is the intent of Debtor to pledge and to grant
to Secured Party for the benefit of Secured Party, a security interest in
certain property of Debtor and to create such a security interest as
hereinafter provided.
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt, and adequacy of which are
hereby acknowledge, Debtor and Secured Party hereby agree as follows:
AGREEMENT
---------
1. Grant of Security Interest. Debtor hereby pledges and grants to
---------------------------
Secured Party for the benefit of Secured Party, a security interest in the
property described in Section 2 below (collectively and severally, the
"Collateral") to secure payment and performance of the obligations of Debtor
to Secured Party described in Section 3 below (collectively and severally,
the "Obligations").
2. Collateral. The Collateral shall consists of all source code,
-----------
object code, flow charts, program descriptions, program listings, layouts,
libraries, diagrams, reports, tests and other data and other programs, and
all related documentation and information, comprising and related to the
version existing on the date hereof and all proceeding versions of and works
in progress or developments relating to the computer software programs known
as the VHDL 2000 Software or VHDL 2000 Simulation Technology ("VHDL
Technology"), as more fully described in Schedule 1 attached hereto, together
----------
with all tools, applications, programs sub-routines, compilers, utilities,
test routines, data bases, libraries, library builder technologies and other
software programs developed
1
<PAGE>
in connection with the development, maintenance, diagnosis, support and/or
enhancement of the VHDL Technology; all Derivative Works of the VHDL Technology
(as defined below); all inventories of the object code product versions
of the VHDL Technology in finished and packaged form, together with related
users manuals and product packaging; all of the debtor's right, title and
interest in and to all intangible, intellectual and industrial property
rights constituting, embodied in or pertaining to the VHDL Technology,
including but not limited to (i) all trademarks, tradenames, service marks
and names, logos or slogans, together with the goodwill related thereto,
including all registrations and applications therefor, (ii) all copyrights
(including audio visual copyrights), mask works and design rights and any
registrations or applications therefor, (iii) all patent rights, including
issued patents, patent applications, reissues or patents of additions,
continuations in part and filing priorities, (iv) all inventions, discoveries,
technology and know-how; (v) all confidential and proprietary information
related to any of the items referenced in clauses (i) through (iv) above,
and (vi) all rights to secure renewals, reissuances and extensions of the
items referenced in clauses (i) through (iv) above; all rights granted to
use the intellectual property of any third party with the VHDL Technology
or to modify and incorporate such intellectual property into the VHDL
Technology, whether pursuant to a license or similar agreement, and all
rights to sublicense such rights, in whole or in part, to others in connection
with the development, distribution or sale of the VHDL Technology, including
all end-user licenses and associated rights related to "off-the-shelf"
commercial software products used in connection with the VHDL Technology;
all rights (including all intellectual property rights and rights to future
payments) under contracts, agreements, licenses, sublicenses, arrangements
or commitments relating to the distribution, licensing, sublicensing, sale,
maintenance, support or development of the VHDL Technology; and all of the
Debtor's rights to enforce and protect the rights associated with the VHDL
Technology, including any and all agreements or licenses entered into for
the protection of rights associated with the VHDL Technology and any and all
agreements between the Debtor and its consultants or employees relating to the
VHDL Technology, including any such software protection rights assigned to or
obtained by the debtor in connection with the Debtor's direct or indirect
acquisition of any of the VHDL Technology. For purposes of this paragraph, the
term "Derivative Work" includes any software program which includes at least
25% of the source code lines used in the VHDL Technology as in existence on
the date hereof.
3. Obligations. The Obligations of Debtor secured by this Agreement
------------
shall consist of any and all debts, obligations and liabilities of Debtor
to Secured Party arising our of, connected with or related to the Promissory
Note or this Agreement and all amendments or extensions or renewals of the
Promissory Note whether now existing or hereafter arising, voluntary or
involuntary, whether or not jointly owed with others, direct or indirect,
absolute or contingent, liquidated or unliquidated, and whether or not from
time to time decreased or extinguished and later increased, created or incurred.
4. Representations and Warranties. Debtor hereby represents and warrants
-------------------------------
to Secured Party that at all times from the date of this Agreement to and
including the date, payment and performance of the Obligations has been
completed in full:
(a) The Debtor is a corporation duly organized, validly existing,
in good standing and possessing all powers and authority to own its property
and to conduct the business in which it is engaged as well as all other
rights and privileges generally granted by the State of California. Debtor
has the full right and power to grant the security interest contemplated
hereunder and there are no presently existing security interests in the
Collateral or any part thereof.
2
<PAGE>
(b) The Debtor is not in violation of, or in default (nor has any
event occurred which with notice, lapse of time, or both, would constitute a
violation or default) in the performance of any obligation, agreement or
condition contained in the organizational documents of the Debtor or otherwise
applicable to the Debtor, or in violation or default of any agreement or
instrument to which the Debtor is a party or by which it may be bound or
to which its property or assets are subject, or any law, order, rule,
regulation, writ, authorization, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign.
(c) There is not now pending or threatened, any action, suit or
proceeding to which the Debtor is subject before or by any court or
governmental agency or body, which might result in any adverse change in
the condition (financial or otherwise), business, properties or prospects
of the Debtors or in its ability to fulfill its obligations under this
Agreement; nor does Debtor know of any circumstances which would give rise
to any such action, suit or proceeding.
(d) The Debtor has furnished to the Secured Party such financial
information regarding the Debtor as the Secured Party has requested. All
information heretofore, herein or hereafter supplied to Secured Party by
or on behalf of Debtor with respect to the Collateral is accurate and complete
in all material respects.
(e) Debtor has the legal authority and has completed all
proceedings and obtained all approvals and consents necessary to execute,
deliver and perform this Agreement and the Promissory Note, as applicable.
(f) The execution, delivery and performance of this Agreement by
the Debtor, and the execution, delivery and performance of the Promissory
Note by Debtor will not contravene or constitute a default under any applicable
law or regulation or any contract, agreement, judgment, order, decree, or
other instrument binding upon or affecting Debtor, as the case may be.
(g) This Agreement and the Promissory Note constitute the legal,
valid and binding obligations of Debtor, enforceable in accordance with
their respective terms, and the pledge of the Collateral pursuant to this
Agreement creates and grants to Secured Party for its benefit a valid,
perfected and enforceable security interest in, and lien upon, the Collateral,
securing the payment of the Obligations.
(h) No authorization, approval, or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required
for the exercise by Secured Party of the rights provided for in this Agreement
or the remedies with respect to the Collateral pursuant to this Agreement,
and
(i) There is no action, suit or proceeding pending or threatened
against Debtor that might adversely affect the Collateral, or Debtor's rights
and interests therein, in any material respect.
5. Further Assurances. At any time and from time to time, at the
------------------
expense of Debtor, Debtor promptly shall execute and deliver all further
instruments and documents and will take all further action, that may reasonably
by necessary or desirable, or that Secured Party may
3
<PAGE>
reasonably request, in order to perfect and protect the pledge and grant of
security interest made by this Agreement or to enable Secured Party to exercise
and enforce its rights and remedies under this Agreement with respect to any
Collateral.
6. Covenants of Debtor. So long as the Promissory Note remains unpaid
-------------------
Debtor shall:
(a) ensure that all acts that may be necessary to maintain,
preserve and protect the Collateral are done;
(b) perform all of its obligations hereunder and under the
Promissory Note when due and before any such obligations are delinquent;
(c) procure, execute and deliver from time to time any
endorsements, assignments, financing statements or other writings deemed
necessary or appropriate by Secured Party to perfect, maintain and protect
its interest hereunder and the priority thereof;
(d) except as otherwise approved in writing by Secured Party,
not surrender, sell, encumber, assign, pledge or otherwise dispose of or
transfer the Collateral and keep the Collateral free of all levies and security
interests or other liens or charges;
(e) pay all taxes, assessments, charges, encumbrances and liens
now or hereafter imposed upon or affecting the Collateral prior to the time
the same becomes delinquent,and
(f) permit Secured Party and/or its authorized representatives
access to inspect and copy Debtor's books and records related to the Collateral
upon reasonable notice.
7. Default and Remedies.
--------------------
(a) The occurrence of any of the following events shall constitute
an event of default under the terms of this Agreement (an "Event of Default"):
i) any representation or warranty of Debtor contained
herein or otherwise made in connection with the transactions contemplated
by this Agreement shall be false or misleading in any material respect on
the date as of which made;
ii) Debtor fails to perform or observe any of the terms,
provisions, covenants, conditions, agreements or obligations contained in
this Agreement and/or the Promissory Note and Debtor has not cured such failure
to perform within five (5) days after notice of such failure by Secured
Party to Debtor; or
iii) an event of default shall occur under the Promissory
Note.
Notice under paragraph 7(a)(ii) will be acceptable if given to Debtor by
telefax at 408-245-0290.
4
<PAGE>
(b) Upon an Event of Default that is not cured within the
applicable time period provided in Section 7(a)(ii) above, if any cure period
is available, Secured Party may and without notice to or demand on Debtor
and in addition to all rights and remedies available to Secured Party under
the terms of this Agreement and the Promissory Note, do any one or more
of the following;
i) foreclose or otherwise enforce Secured Party's security
interest in any manner permitted by law, or provided for in this Agreement;
ii) declare to be due and payable, whereupon the same
shall become and be immediately due and payable, without demand, protest,
presentment or further notice of any kind, all of which are hereby expressly
waived by Debtor: all principal remaining unpaid, plus interest (computed
on the basis of a 365-day year (or 366, if applicable), actual days elapsed)
on the unpaid principal balance hereof from the date of the Promissory Note
at the rate of ten percent (10%), or the maximum percentage allowed by law,
accrued on the average daily balance of all amounts of principal outstanding;
Debtor's fifty-percent (50%) undivided ownership interest in the VHDL 2000
Software; and all royalties, fees, and payments received from licensing
agreements for the VHDL 2000 Software;
iii) extend the time of payment of, compromise, or settle
for cash, credit, or otherwise upon any terms, any part or all of the
Collateral;
iv) take possession of and endorse in the name of Debtor
as appropriate, any notes, checks, money orders, drafts, cash, insurance
payments, and any other instruments received in payment of the Collateral,
or any part thereof; collect, sue for, and give satisfactions for, monies
due on account of the Collateral; and withdraw any claims, suits, or
proceedings pertaining to, or arising out of Debtor's and/or Secured Party's
right to the Collateral.
5
<PAGE>
v) recover from Debtor all costs and expenses including, without
limitation, reasonable attorneys' fees (including, without limitation, the
reasonable estimate of the allocable costs of in-house legal counsel and
staff), incurred or paid by Secured Party in exercising any right, power
or remedy provided by this Agreement or by law.
8. Waiver of Hearing. Debtor hereby expressly waives, to the fullest
-----------------
extent permitted by law, any constitutional right to a judicial hearing
prior to the time Secured Party enforces its rights pursuant to this Agreement
upon the occurrence of an Event of Default as provided herein.
9. Cumulative Rights. The rights, powers and remedies of Secured
-----------------
Party under this Agreement shall be in addition to all rights, powers and
remedies given to Secured Party by virtue of any statute or rule of law,
the Promissory Note or any other agreement contemplated hereunder, all of
which rights, powers and remedies shall be cumulative and may be exercised
successively or concurrently without impairing Secured Party's security
interest in the Collateral.
10. Waivers. No waiver of any provision of this Agreement nor consent
-------
to any departure by Debtor herefrom shall in any event be effective unless
the same be in writing and signed by Secured Party and then such waiver,
or consent shall be effective only in the specific instance and for the
specific purpose for which given. Any waiver, forbearance, failure or delay
by Secured Party in exercising, or the exercise or beginning of exercise
by Secured Party of, any right, power or remedy, simultaneous or later,
shall not preclude the further simultaneous or later exercise thereof, and
every right, power or remedy of Secured Party shall continue in full force
and effect until such right, power or remedy is specifically waived in a
writing executed by Secured Party.
11. Assignment. This Agreement shall be binding upon and inure to
----------
the benefit of Secured Party, and Debtor and their respective successors
and assigns. Neither Debtor, nor Secured Party, may assign this Agreement
without the prior written consent of the other party; provided, however,
that Secured Party may assign this Agreement to any of its affiliates without
the prior written consent of Debtor, subject to all defenses, if any.
12. Continuing Security Interest. This Agreement shall create a
----------------------------
continuing security interest in the Collateral and shall remain in full
force and effect until payment in full of the Obligations. This Agreement
shall terminate and be of no further force and effect upon the payment in
full of the Obligations by Debtor.
13. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New Jersey.
14. References. As used in this Agreement, the singular includes the
----------
plural. The headings contained in this Agreement have been inserted for
convenience of reference only and shall in no way restrict, modify or construe
any of the terms or provisions of this Agreement.
15. Amendment. This Agreement may be amended, altered or modified
---------
only by a written instrument attached to his Agreement and duly executed
by Debtor and Secured Party.
6
<PAGE>
16. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing, and shall be deemed to have been duly given
on the date of delivery if delivered in person to the party named below,
or three (3) days after mailing if deposited in the United States mail,
first class, registered or certified mail, return receipt requested, with
postage prepaid as follows:
Secured Party: Racal-Redac, Inc.
c/o The Racal Corporation
Law Department
1601 N. Harrison Parkway
Sunrise, Florida 33323-2899
Attn: L. Rodney Manning
Debtor: IKOS Systems, Inc.
19050 Pruneridge Avenue
Cupertino, California 95014
Attn: Gerald S. Casilli
17. Entire Agreement Severability. This Agreement and the Promissory
-----------------------------
Note contain the entire agreement between Secured Party and Debtor. If any
of the provisions of this Agreement shall be held invalid and unenforceable,
this Agreement shall be construed as if not containing those provisions
and the rights and obligations of the parties hereto shall be construed
and enforced accordingly.
IKOS Systems, Inc.
A Delaware corporation, with its principal
place of business in Cupertino, California
By: /s/GERALD S. CASILLI
--------------------
Its: Chairman & CEO
--------------------
7
<PAGE>
SCHEDULE I
----------
VHDL 2000 Simulation Technology
-------------------------------
"VHDL 2000 software" means the Source Code and Source Documentation (as
per the VHDL 2000 users manual - Racal documents number 93-0326-01 which
is attached) of the software required to compile the VHDL 2000 product or
IKOS' Voyager - VS product, except for the Framework Software (which is
owned by Racal Redac). In addition, VHDL 2000 Software includes the VISION
Software (owned by Racal Redac) that is excluded from the Framework Software.
VHDL 2000 consists of three main software components:
Graphical User Interface
VHDL Tool Integration Platform (VTIP) from CAD Language
Systems, Inc.
VHDL Simulation Kernel
Each of the above is a distinct process and can be run on any host configured
to be a VHDL 2000 server, with the condition that the Vision Framework
Interface must be run on the local workstation or optionally on an X-Terminal
Server, but the VTIP and Simulation servers can run on any other machine
(or locally).
VHDL 2000 provides a Simulation Server dialog box in which you can examine
the network and select the desired machine for each process.
<PAGE>
EXHIBIT 4
FINANCING STATEMENT
-------------------
DEBTOR: IKOS SYSTEMS, INC.
19050 Pruneridge Avenue
Cupertino, California 95014
SECURED
PARTY: RACAL-REDAC, INC.
1000 Wyckoff Avenue
Mahwah, New Jersey 07430
PROPERTY COVERED BY THIS FINANCING STATEMENT:
IKOS Systems, Inc.'s fifty percent (50%) undivided ownership interest
---------------------------------------------------------------------
in VHDL 2000 Software
---------------------
VHDL 2000 Software includes:
All source code, object code, flow charts, program descriptions,
program listings, layouts, libraries, diagrams, reports,
tests and other data and other programs, and all related
documentation and information, comprising and related to
the version existing on the date hereof and all preceding
versions of and works in progress or developments relating
to the computer software programs known as the VHDL 2000
Simulation Technology ("VHDL Technology"), as more fully
described in Schedule 1 attached hereto, together with all
----------
tools, applications, programs, sub-routines, compilers,
utilities, test routines, data bases, libraries, library
builder technologies and other software programs developed
in connection with the development, maintenance, diagnosis,
support and/or enhancement of the VHDL Technology; all
Derivative Works of the VHDL Technology (as defined below);
all inventories of the object code product versions of the
VHDL Technology in finished and packaged form, together with
related users manuals and product packaging; all of the debtor's
right, title and interest in and to all intangible, intellectual
and industrial property rights constituting, embodied in
or pertaining to the VHDL Technology, including but not limited
to (i) all trademarks, tradenames, service marks and names,
logos or slogans, together with the goodwill related thereto,
including all registrations and applications therefor, (ii)
all copyrights (including audio visual copyrights), mask works
and design rights and any registrations or applications
therefor, (iii) all patent rights, including issued patents,
patent applications, reissues or patents of additions,
continuations in part and filing priorities, (iv) all
inventions, discoveries, technology and know-how; (v) all
confidential and proprietary information related to any of
the items referenced in clauses (i) through (iv) above, and
(vi) all rights
<PAGE>
to secure renewals, reissuances and extensions of the items
referenced in clauses (i) through (iv) above; all rights granted
to use the intellectual property of any third party with
the VHDL Technology or to modify and incorporate such
intellectual property into the VHDL Technology, whether pursuant
to a license or similar agreement, and all rights to sublicense
such rights, in whole or in part, to others in connection
with the development, distribution or sale of the VHDL
Technology, including all end-user licenses and associated
rights related to "off-the-shelf" commercial software products
used in connection with the VHDL Technology; all rights
(including all intellectual property rights and rights to
future payments) under contracts, agreements, licenses,
sublicenses, arrangements or commitments relating to the
distribution, licensing, sublicensing, sale, maintenance,
support or development of the VHDL Technology; and all of
the Debtor's rights to enforce and protect the rights associated
with the VHDL Technology, including any and all agreements
or licenses entered into for the protection of rights associated
with the VHDL Technology and any and all agreements between
the Debtor and its consultants or employees relating to the
VHDL Technology, including any such software protection rights
assigned to or obtained by the debtor in connection with
the Debtor's direct or indirect acquisition of any of the
VHDL Technology. For purposes of this paragraph, the term
"Derivative Work" includes any software program which includes
at least 25% of the source code lines used in the VHDL
Technology as in existence on the date hereof.
IKOS SYSTEMS, INC.
By: /s/GERALD S. CASILLI
----------------------
Its: Chairman & CEO
----------------------
Date: 7 April 1994
----------------------
- 2 -
<PAGE>
SCHEDULE 1
----------
VHDL 2000 Simulation Technology
-------------------------------
"VHDL 2000 software" means the Source Code and Source Documentation (as
per the VHDL 2000 users manual - Racal documents number 93-0324-01 which
is attached) of the software required to compile the VHDL 2000 product or
IKOS' Voyager - VS product, except for the Framework Software (which is
owned by Racal Redac). In addition, VHDL 2000 Software includes the VISION
Software (owned by Racal Redac) that is excluded from the Framework Software.
VHDL 2000 consists of three main software components:
Graphical User Interface
VHDL Tool Integration Platform (VTIP) from CAD Language
Systems, Inc.
VHDL Simulation Kernel
Each of the above is a distinct process and can be run on any host configured
to be a VHDL 2000 server, with the condition that the Vision Framework
Interface must be run on the local workstation or optionally on an X-Terminal
Server, but the VTIP and Simulation servers can run on any other machine
(or locally).
VHDL 2000 provides a simulation Server dialog box in which you can examine
the network and select the desired machine for each process.
<PAGE>
IKOS SYSTEMS, INC.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
1. Establishment, Purpose and Term of Plan.
---------------------------------------
1.1 Establishment. The IKOS Systems, Inc. 1995 Outside Directors Stock
Option Plan (the "Plan") is hereby established effective as of June 20, 1995
(the "Effective Date").
1.2 Purpose. The purpose of the Plan is to advance the interests of
the Participating Company Group and its stockholders by providing an incentive
to attract and retain highly qualified persons to serve as Outside Directors of
the Company and by creating additional incentive for Outside Directors to
promote the growth and profitability of the Participating Company Group.
1.3 Term of Plan. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed.
2. Definitions and Construction.
----------------------------
2.1 Definitions. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "Code" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "Committee" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "Company" means IKOS Systems, Inc., a Delaware corporation,
or any successor corporation thereto.
1
<PAGE>
(e) "Consultant" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(f) "Director" means a member of the Board or the board of
directors of any other Participating Company.
(g) "Employee" means any person treated as an employee (including
an officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" means, as of any date, if there is then a
public market for the Stock, the closing price of the Stock (or the mean of the
closing bid and asked prices of the Stock if the Stock is so reported instead)
as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date. If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(j) "Option" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan.
(k) "Optionee" means a person who has been granted one or more
Options.
(l) "Option Agreement" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee.
(m) "Outside Director" means a Director of the Company who is not
an Employee.
(n) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
2
<PAGE>
(o) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation.
(p) "Participating Company Group" means, at any point in time,
all corporations collectively which are then Participating Companies.
(q) "Rule 16b-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or regulation.
(r) "Service" means the Optionee's service with the Participating
Company Group, whether in the capacity of an Employee, a Director or a
Consultant. The Optionee's Service shall not be deemed to have terminated merely
because of a change in the capacity in which the Optionee renders Service to the
Participating Company Group or a change in the Participating Company for which
the Optionee renders such Service, provided that there is no interruption or
termination of the Optionee's Service. The Optionee's Service shall be deemed to
have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(s) "Stock" means the common stock, par value $0.01, of the
Company, as adjusted from time to time in accordance with Section 4.2.
(t) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. Administration.
--------------
3.1 Administration by the Board. The Plan shall be administered by the
Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 Limitations on Authority of the Board. Notwithstanding any other
provision herein to the contrary, the Board shall have no authority, discretion,
3
<PAGE>
or power to select the Outside Directors who will receive Options, to set
the exercise price of the Options, to determine the number of shares of
Stock to be subject to an Option or the time at which an Option shall be
granted, to establish the duration of an Option, or to alter any other terms
or conditions specified in the Plan, except in the sense of administering
the Plan subject to the provisions of the Plan.
4. Shares Subject to Plan.
----------------------
4.1 Maximum Number of Shares Issuable. Subject to adjustment
as provided in Section 4.2, the maximum aggregate number of shares of Stock
that may be issued under the Plan shall be one hundred thousand (100,000)
and shall consist of authorized but unissued shares or reacquired shares
of Stock or any combination thereof. If an outstanding Option for any reason
expires or is terminated or canceled or shares of Stock acquired, subject
to repurchase, upon the exercise of an Option are repurchased by the Company,
the shares of Stock allocable to the unexercised portion of such Option,
or such repurchased shares of Stock, shall again be available for issuance
under the Plan.
4.2 Adjustments for Changes in Capital Structure. In the event
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure
of the Company, appropriate adjustments shall be made in the number and
class of shares subject to the Plan, to the "Initial Option" and "Annual
Option" (as defined in Section 6.1), and to any outstanding Options, and
in the exercise price of any outstanding Options. If a majority of the shares
which are of the same class as the shares that are subject to outstanding
Options are exchanged for, converted into, or otherwise become (whether
or not pursuant to a Transfer of Control as defined in Section 8.1) shares
of another corporation (the "New Shares"), the Board may unilaterally amend
the outstanding Options to provide that such Options are exercisable for
New Shares. In the event of any such amendment, the number of shares subject
to, and the exercise price of, the outstanding Options shall be adjusted
in a fair and equitable manner as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting
from an adjustment pursuant to this Section 4.2 shall be rounded down to
the nearest whole number, and in no event may the exercise price of any
Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option.
5. Eligibility and Type of Options.
-------------------------------
5.1 Persons Eligible for Options. An Option shall be granted
only to a person who, at the time of grant, is an Outside Director.
5.2 Options Authorized. Options shall be nonstatutory stock options;
that is, options which are not treated as incentive stock options within
the meaning of Section 422(b) of the Code.
4
<PAGE>
6. Terms and Conditions of Options. Options shall be evidenced by
-------------------------------
Option Agreements specifying the number of shares of Stock covered thereby,
in such form as the Board shall from time to time establish. Option Agreements
may incorporate all or any of the terms of the Plan by reference and shall
comply with and be subject to the following terms and conditions:
6.1 Automatic Grant of Options. Subject to execution by an Outside
Director of the appropriate Option Agreement, Options shall be granted
automatically and without further action of the Board, as follows:
(a) Initial Option. Each Outside Director shall be granted
an initial Option as follows (an "Initial Option"):
(i) Each Outside Director holding office on the Effective
Date shall be granted on the Effective Date an Option to purchase ten thousand
(10,000) shares of Stock.
(ii) Each Outside Director first elected or appointed
to the Board after the Effective Date shall be granted, on the date of such
initial election or appointment, an Option to purchase ten thousand (10,000)
shares of Stock. Notwithstanding anything herein to the contrary, a Director
of the Company who previously did not qualify as an Outside Director shall not
receive an Initial Option in the event that such Director subsequently becomes
an Outside Director.
(b) Annual Option. Each Outside Director shall be granted
an annual Option as follows (an "Annual Option"):
(i) Each Outside Director (including any Director of
the Company who previously did not qualify as an Outside Director but who
subsequently becomes an Outside Director) shall be granted, on the date
of each annual meeting of stockholders of the Company (an "Annual Meeting")
following which such person remains an Outside Director, an Option to purchase
two thousand five hundred (2,500) shares of Stock, subject to adjustment
as provided in Section 6.1(b)(ii). Notwithstanding the foregoing, an Outside
Director who receives an Initial Option on the date of an Annual Meeting
shall not also receive an Annual Option on such date.
(ii) The number of shares of Stock subject to the first
Annual Option granted to any Outside Director whose initial election to
the Board was not at an Annual Meeting shall be determined by multiplying
2,500 by a ratio, the numerator of which is the number of days from the
date of such Outside Director's initial election or appointment to the date
of the first Annual Meeting occurring thereafter and the denominator of
which is three hundred sixty-five (365).
(c) Right to Decline Option. Notwithstanding the foregoing,
any person may elect not to receive an Option by delivering written notice
of such
5
<PAGE>
election to the Board no later than the day prior to the date such Option
would otherwise be granted. A person so declining an Option shall receive
no payment or other consideration in lieu of such declined Option. A person
who has declined an Option may revoke such election by delivering written
notice of such revocation to the Board no later than the day prior to the
date such Option would be granted pursuant to Section 6.1(a) or (b), as
the case may be.
6.2 Exercise Price. The exercise price per share of Stock subject
to an Option shall be the Fair Market Value of a share of Stock on the date
the Option is granted.
6.3 Exercise Period. Each Option shall terminate and cease to
be exercisable on the date ten (10) years after the date of grant of the
Option unless earlier terminated pursuant to the terms of the Plan or the
Option Agreement.
6.4 Right to Exercise Options.
(a) Initial Option. Except as otherwise provided in the
Plan or in the Option Agreement and provided that the Optionee's Service
is continuous from the date of grant of the Initial Option (the "Initial
Option Grant Date") to the respective vesting date, each Initial Option
shall become vested and exercisable prior to the termination thereof
cumulatively as to twenty-five percent (25%) of the shares subject to the
Initial Option on and after the day immediately preceding the date of each
of the first four (4) Annual Meetings occurring after the Initial Option
Grant Date.
(b) Annual Option. Except as otherwise provided in the
Plan or in the Option Agreement and provided that the Optionee's Service is
continuous from the date of grant of the Annual Option (the "Annual Option
Grant Date") to the vesting date, each Annual Option shall become vested and
exercisable in full on and after the day immediately preceding the date of the
fourth (4th) Annual Meeting occurring after the Annual Option Grant
Date and prior to the termination of such Annual Option.
6.5 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise
provided below, payment of the exercise price for the number of shares of
Stock being purchased pursuant to any Option shall be made (i) in cash,
by check, or cash equivalent, (ii) by tender to the Company of shares of
Stock owned by the Optionee having a Fair Market Value not less than the
exercise price, (iii) by the assignment of the proceeds of a sale or loan
with respect to some or all of the shares being acquired upon the exercise
of the Option (including, without limitation, through an exercise complying
with the provisions of Regulation T as promulgated from time to time by
the Board of Governors of the Federal Reserve System) (a "Cashless Exercise"),
or (iv) by any combination thereof.
6
<PAGE>
(b) Tender of Stock. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions
of any law, regulation or agreement restricting the redemption of the Company's
stock. Unless otherwise provided by the Board, an Option may not be exercised
by tender to the Company of shares of Stock unless such shares either have
been owned by the Optionee for more than six (6) months or were not acquired,
directly or indirectly, from the Company.
(c) Cashless Exercise. The Company reserves, at any and
all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for
the exercise of Options by means of a Cashless Exercise.
6.6 Tax Withholding. The Company shall have the right, but not
the obligation, to deduct from the shares of Stock issuable upon the exercise
of an Option, or to accept from the Optionee the tender of, a number of
whole shares of Stock having a Fair Market Value equal to all or any part
of the federal, state, local and foreign taxes, if any, required by law
to be withheld by the Participating Company Group with respect to such Option
or the shares acquired upon exercise thereof. Alternatively or in addition,
in its sold discretion, the Company shall have the right to require the
Optionee to make adequate provision for any such tax withholding obligations
of the Participating Company Group arising in connection with the Option
or the shares acquired upon exercise thereof. The Company shall have no
obligation to deliver shares of Stock until the Participating Company Group's
tax withholding obligations have been satisfied.
7. Standard Form of Option Agreement.
---------------------------------
7.1 Initial Option. Unless otherwise provided for by the Board
at the time an Initial Option is granted, each Initial Option shall comply
with and be subject to the terms and conditions set forth in the form of
Nonstatutory Stock Option Agreement for Outside Directors (Initial Option)
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.2 Annual Option. Unless otherwise provided for by the Board
at the time an Annual Option is granted, each Annual Option shall comply
with and be subject to the terms and conditions set forth in the form of
Nonstatutory Stock Option Agreement for Outside Directors (Annual Option)
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.3 Authority to Vary Terms. Subject to the limitations set forth
in Section 3.2, the Board shall have the authority from time to time to
vary the terms of any of the standard forms of Option Agreement described
in this Section 7 either in connection with the grant or amendment of an
individual Option or in connection with the authorization of a new standard
form or forms; provided however, that the terms and conditions of any such
new, revised or amended
7
<PAGE>
standard form or forms of Option Agreement shall be in accordance with the
terms of the Plan. Such authority shall include, but not by way of limitation,
the authority to grant Options which are immediately exercisable subject
to the Company's right to repurchase any invested shares of Stock acquired
by the Optionee upon the exercise of an Option in the event such Optionee's
Service is terminated for any reason. In no event, however, shall the Board
be permitted to vary the terms of any standard form of Option Agreement
if such change would cause the Plan to cease to qualify as a formula plan
pursuant to Rule 16b-3 at any such time as any class of equity security
of the Company is registered pursuant to Section 12 of the Exchange Act.
8. Transfer of Control.
-------------------
8.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the stockholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(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.
(b) A "Transfer of Control" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before
the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the
Company's voting stock immediately before the Transaction, direct or indirect
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the corporation
or corporations to which the assets of the Company were transferred (the
"Transferee Corporation(s)"), as the case may be. For purposes of the preceding
sentence, indirect beneficial ownership shall include, without limitation,
an interest resulting from ownership of the voting stock of one or more
corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through
one or more subsidiary corporations. The Board shall have the right to
determine whether multiple sales or exchanges of the voting stock of the
Company or multiple Ownership Change Events are related, and its determination
shall be final, binding and conclusive.
8
<PAGE>
8.2 Effect of Transfer of Control on Options. In the event of a
Transfer of Control, any unexercisable or unvested portion of the outstanding
Options shall be immediately exercisable and vested in full as of the date ten
(10) days prior to the date of the Transfer of Control. The exercise or vesting
of any Option that was permissible solely by reason of this Section 8.2 shall be
conditioned upon the consummation of the Transfer of Control. In addition, the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof, as the case may be (the "Acquiring Corporation"), may
either assume the Company's rights and obligations under outstanding Options or
substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Transfer of Control and any consideration received pursuant to the
Transfer of Control with respect to such shares shall continue to be subject to
all applicable provisions of the Option Agreement evidencing such Option except
as otherwise provided in such Option Agreement. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the outstanding
Options immediately prior to an Ownership Change Event described in Section
8.1(a)(i) constituting a Transfer of Control is the surviving or continuing
corporation and immediately after such Ownership Change Event less than fifty
percent (50%) of the total combined voting power of its voting stock is held by
another corporation or by other corporations that are members of an affiliated
group within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate.
9. Nontransferability of Options. During the lifetime of the Optionee, an
-----------------------------
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
10. Indemnification. In addition to such other rights of indemnification as
---------------
they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional
9
<PAGE>
misconduct in duties; provided, however, that within sixty (60) days after the
institution of such action, suit or proceeding, such person shall offer to the
Company, in writing, the opportunity at its own expense to handle and defend the
same.
11. Termination of Amendment of Plan. The Board may terminate or amend the
--------------------------------
Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the total number of shares of
Stock that may be issued under the Plan (except by operation of the provisions
of Section 4.2), and (b) no expansion in the class of persons eligible to
receive Options. Furthermore, to the extent required by Rule 16b-3, provisions
of the Plan addressing eligibility to participate in the Plan and the amount,
price and timing of Options shall not be amended more than once every six (6)
months, other than to comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder. In any event,
no termination or amendment of the Plan may adversely affect any then
outstanding Option, or any unexercised portion thereof, without the consent of
the Optionee, unless such termination or amendment is necessary to comply with
any applicable law or government regulation.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing IKOS Systems, Inc. 1995 Outside Directors Stock Option Plan was
duly adopted by the Board on June 20, 1995.
----------------------------------------
Secretary
10
<PAGE>
PLAN HISTORY
------------
June 20, 1995 Board adopts Plan, with an initial reserve of 100,000
shares.
January __, 1996 Stockholders approve Plan, with an initial reserve of
100,000 shares.
11
<PAGE>
STANDARD FORM OF
IKOS SYSTEMS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(INITIAL OPTION)
<PAGE>
IKOS SYSTEMS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(INITIAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (INITIAL
OPTION) (the "Option Agreement") is made and entered into as of ,
------------
199 , by and between IKOS Systems, Inc. and (the
- ---------------------
"Optionee").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "Option").
1. Definitions and Construction.
-----------------------------
1.1 Definitions. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "Date of Option Grant" means , 199 .
------------- -
(b) "Number of Option Shares" means ten thousand (10,000) shares
of Stock, as adjusted from time to time pursuant to Section 9.
(c) "Exercise Price" means $ per share of Stock, as
-------
adjusted from time to time pursuant to Section 9.
(d) "Initial Exercise Date" means the day immediately preceding
the date of the first (1st) annual meeting of the stockholders of the Company
occurring after the Date of Option Grant.
1
<PAGE>
(e) "Vested Percentage" means, on any relevant date, the
percentage determined as follows:
Vested Percentage
-----------------
Prior to Initial Exercise Date 0%
On Initial Exercise Date, 25%
provided the Optionee's Service
is continuous from the Date of
Option Grant until the Initial
Exercise Date
Plus
----
On the day immediately 25%
preceding the date of each
successive annual meeting of
the stockholders of the
Company until the Vested
Percentage equals 100%,
provided the Optionee's Service
is continuous from the Date of
Option Grant until day
immediately preceding the date
of such meeting, an additional
(f) "Option Expiration Date" means the date ten (10) years
after the Date of Option Grant.
(g) "Board" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the
Plan, "Board" shall also mean such Committee(s).
(h) "Code" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(i) "Committee" means a committee of the Board duly appointed
to administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to amend or terminate the Plan
at any time, subject to the terms of the Plan and any applicable limitations
imposed by law.
(j) "Company" means IKOS Systems, Inc., a Delaware corporation,
or any successor corporation thereto.
2
<PAGE>
(k) "Consultant" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee
or a Director.
(l) "Director" means a member of the Board or of the board
of directors of any other Participating Company.
(m) "Disability" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the
major duties of the Optionee's position with the Participating Company Group
because of the sickness or injury of the Optionee.
(n) "Employee" means any person treated as an employee (including
an officer or a Director who is also treated as an employee) in the records
of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(o) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(p) "Fair Market Value" means, as of any date, if there is
then a public market for the Stock, the closing price of the Stock (or the
mean of the closing bid and asked prices of the Stock if the Stock is so
reported instead) as reported on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System, the NASDAQ National Market
System or such other national or regional securities exchange or market
system constituting the primary market for the Stock. If the relevant date
does not fall on a day on which the Stock is trading on NASDAQ, the NASDAQ
National Market System or other national or regional securities exchange
or market system, the date on which the Fair Market Value shall be established
shall be the last day on which the Stock was so traded prior to the relevant
date. If there is then no public market for the Stock, the Fair Market Value
on any relevant date shall be as determined by the Board without regard
to any restriction other than a restriction which, by its terms, will never
lapse.
(q) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "Participating Company Group" means, at any point in time,
all corporations collectively which are then Participating Companies.
(t) "Plan" means the IKOS Systems, Inc. 1995 Outside Directors
Stock Option Plan.
3
<PAGE>
(u) "Rule 16b-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or
regulation.
(v) "Securities Act" means the Securities Act of 1933, as amended.
(w) "Service" means the Optionee's service with the Participating
Company Group, whether in the capacity of an Employee, a Director or a
Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders
Service to the Participating Company Group or a change in the Participating
Company for which the Optionee renders such Service, provided that there
is no interruption or termination of the Optionee's Service. The Optionee's
Service shall be deemed to have terminated either upon an actual termination
of Service or upon the corporation for which the Optionee performs Service
ceasing to be a Participating Company.
(x) "Stock" means the common stock, par value $0.01, of the
Company, as adjusted from time to time in accordance with Section 9.
(y) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
1.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include
the singular, and the term "or" shall include the conjunctive as well as
the disjunctive.
2. Tax Status of the Option. This Option is intended to be a nonstatutory
-------------------------
stock option and shall not be treated as an incentive stock option within
the meaning of Section 422(b) of the Code.
3. Administration. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of
a Participating Company shall be the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, or election.
4
<PAGE>
4. Exercise of the Option.
----------------------
4.1 Right to Exercise.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the
Number of Option Shares multiplied by the Vested Percentage less the number
of shares previously acquired upon exercise of the Option. In no event shall
the Option be exercisable for more shares than the Number of Option Shares.
(b) Notwithstanding the foregoing, in the event that the adoption
of the Plan or any amendment of the Plan is subject to the approval of the
Company's stockholders in order for the Plan or the grant of the Option
to comply with the requirements of Rule 16b-3, the Option shall not be
exercisable prior to such stockholder approval.
4.2 Method of Exercise. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option,
the number of whole shares of Stock for which the Option is being exercised
and such other representations and agreements as to the Optionee's investment
intent with respect to such shares as may be required pursuant to the
provisions of this Option Agreement. The written notice must be signed by
the Optionee and must be delivered in person, by certified or registered
mail, return receipt requested, by confirmed facsimile transmission, or
by such other means as the Company may permit, to the Chief Financial Officer
of the Company, or other authorized representative of the Participating
Company Group, prior to the termination of the Option as set forth in Section
6, accompanied by full payment of the aggregate Exercise Price for the number
of shares of Stock being purchased. The Option shall be deemed to be exercised
upon receipt by the Company of such written notice and the aggregate Exercise
Price.
4.3 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of
shares of Stock for which the Option is being exercised shall be made (i)
in cash, by check, or cash equivalent, (ii) by tender to the Company of
whole shares of Stock owned by the Optionee having a Fair Market Value not
less than the aggregate Exercise Price, (iii) by means of the Cashless
Exercise, as defined in Section 4.3(c), or (iv) by any combination of the
foregoing.
(b) Tender of Stock. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions
of any law, regulation or agreement restricting the redemption of the Company's
stock. The Option may not be exercised by tender to the Company of shares
of Stock
5
<PAGE>
unless such shares either have been owned by the Optionee for more than six (6)
months or were not acquired, directly or indirectly, from the Company.
(c) Cashless Exercise. A "Cashless Exercise" means the assignment in
a form acceptable to the Company of the proceeds of a sale or loan with respect
to some or all of the shares of Stock acquired upon the exercise of the Option
pursuant to a program or procedure approved by the Company (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System). The Company reserves, at any and all times, the right, in the Company's
sole and absolute discretion, to decline to approve or terminate any such
program or procedure.
4.4 Tax Withholding. At the time the Option is exercised, in whole or in
part, or at any time thereafter as requested by the Company, the Optionee agrees
to make adequate provision for any sums required to satisfy the federal, state,
local and foreign tax withholding obligations of the Participating Company
Group, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of
the Option, (ii) the transfer, in whole or in part, of any shares acquired upon
exercise of the Option, or (iii) the lapsing of any restriction with respect to
any shares acquired upon exercise of the Option. The Optionee is cautioned that
the Option is not exercisable unless the tax withholding obligations of the
Participating Company Group are satisfied. Accordingly, the Optionee may not be
able to exercise the Option when desired even though the Option is vested, and
the Company shall have no obligation to issue a certificate for such shares.
4.5 Certificate Registration. Except in the event the Exercise Price is
paid by means of a Cashless Exercise, the certificate for the shares as to which
the Option is exercised shall be registered in the name of the Optionee, or, if
applicable, the heirs of the Optionee.
4.6 Restrictions on Grant of the Option and Issuance of Shares. The grant
of the Option and the issuance of shares of Stock upon exercise of the Option
shall be subject to compliance with all applicable requirements of federal,
state or foreign law with respect to such securities. The Option may not be
exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
law or violation of any applicable federal, state or foreign securities laws or
other law or regulations or the requirements of any stock exchange or market
system upon which the Stock may then be listed. In addition, the Option may not
be exercised unless (i) a registration statement under the Securities Act shall
at the time of exercise of the Option be in effect with respect to the shares
issuable upon exercise of the Option or (ii) in the opinion of legal counsel to
the Company, the shares issuable upon exercise of the Option may be issued in
accordance with the terms of an applicable exemption from the registration
requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION
MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
6
<PAGE>
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 Fractional Shares. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. Nontransferability of the Option. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws or descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. Termination of the Option. The Option shall terminate and may no longer
-------------------------
be exercised on the first to occur of (a) the Option Expiration Date, (b) the
last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. Effect of Termination of Service.
--------------------------------
7.1 Option Exercisability.
(a) Disability. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
(b) Death. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative or other person who acquired the right to exercise the Option by
7
<PAGE>
reason of the Optionee's death) at any time prior to the expiration of twelve
(12) months after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date. The Optionee's Service shall
be deemed to have terminated on account of death if the Optionee dies within
three (3) months after the Optionee's termination of Service.
(c) Other Termination of Service. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within twelve (12) months after the date on which the Optionee's
Service terminated, but in any event no later than the Option Expiration Date.
7.2 Extension if Exercise Prevented by Law. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.3 Extension if Optionee Subject to Section 16(b). Notwithstanding
the foregoing, if a sale, within the applicable time periods set forth in
Section 7.1, of shares acquired upon the exercise of the Option shall remain
exercisable until the earliest to occur of (i) the tenth (10th) day following
the date on which a sale of such shares by the Optionee would no longer be
subject to such suit or (ii) the Option Expiration Date.
8. Ownership Change and Transfer of Control.
8.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(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.
8
<PAGE>
(b) A "Transfer of Control" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before
the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the
Company's voting stock immediately before the Transaction, direct or indirect
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the corporation
or corporations to which the assets of the Company were transferred (the
"Transferee Corporation(s)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of
one or more corporations which, as a result of the Transaction, own the
Company or the Transferee Corporation(s), as the case may be, either directly
or through one or more subsidiary corporations. The Board shall have the
right to determine whether multiple sales or exchanges of the voting stock
of the Company or multiple Ownership Change Events are related, and its
determination shall be final, binding and conclusive.
8.2 Effect of Transfer of Control on Option. In the event of a
Transfer of Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the
date of the Transfer of Control. Any exercise of the Option that was
permissible solely by reason of this Section 8.2 shall be conditioned upon
the consummation of the Transfer of Control. In addition, the surviving,
continuing, successor, or purchasing corporation or parent corporation thereof,
as the case may be (the "Acquiring Corporation"), may either assume the
Company's rights and obligations under the Option or substitute for the
Option a substantially equivalent option for the Acquiring Corporation's
stock. The Option shall terminate and cease to be outstanding effective
as of the date of the Transfer of Control to the extent that the Option
is neither assumed or substituted for by the Acquiring Corporation in
connection with the Transfer of Control nor exercised as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect
to such shares shall continue to be subject to all applicable provisions
of this Option Agreement except as otherwise provided herein. Furthermore,
notwithstanding the foregoing, if the corporation the stock of which is
subject to the Option immediately prior to an Ownership Change Event described
in Section 8.1(a)(i) constituting a Transfer of Control is the surviving
or continuing corporation and immediately after such Ownership Change Event
less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a)
of the Code without regard to the provisions of Section 1504(b) of the Code,
the Option shall not terminate.
9. Adjustments for Changes in Capital Structure. In the event
--------------------------------------------
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification, or similar change in the capital structure
of the Company,
9
<PAGE>
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change) shares of another corporation (the "New Shares"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded down to the nearest whole number, and in no event may the Exercise
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Option.
10. Rights as a Stockholder. The Optionee shall have no rights as
-----------------------
a stockholder with respect to any shares covered by the Option until the
date of the issuance of a certificate for the shares for which the Option
has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date such certificate is issued, except
as provided in Section 9.
11. Legends. The Company may at the time place legends referencing
-------
any applicable federal, state or foreign securities law restrictions on
all certificates representing shares of stock subject to the provisions
of this Option Agreement. The Optionee shall, at the request of the Company,
promptly present to the Company any and all certificates representing shares
acquired pursuant to the Option in the possession of the Optionee in order
to carry out the provisions of this Section.
12. Binding Effect. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
13. Termination or Amendment. The Board may terminate or amend the
------------------------
Plan or the Option at any time; provided, however, that no such termination
or amendment may adversely affect the Option or any unexercised portion
hereof without the consent of the Optionee unless such termination or amendment
is necessary to comply with any applicable law or government regulation.
No amendment or addition to this Option Agreement shall be effective unless
in writing.
14. Integrated Agreement. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company
Group with respect to the subject matter contained herein, and there are
no agreements, understandings, restrictions, representations, or warranties
among the Optionee
10
<PAGE>
and the Participating Company Group with respect to such subject matter
other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive
any exercise of the Option and shall remain in full force and effect.
15. Applicable Law. This Option Agreement shall be governed by the
--------------
laws of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the
State of California.
IKOS SYSTEMS, INC.
By:
----------------------------------
Title:
-------------------------------
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement and hereby accepts the Option subject
to all of the terms and provisions thereof. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations
of the Board upon any questions arising under this Option Agreement.
OPTIONEE
Date:
-------------------------------- -------------------------------------
11
<PAGE>
NONSTATUTORY STOCK OPTION
NOTICE OF EXERCISE
To: Chief Financial Officer
IKOS Systems, Inc.
I hereby exercise my Option to purchase the number of shares (the
"Shares") of Common Stock of IKOS Systems, Inc. (the "Company") set forth
below. Full payments for the Shares in the manner set forth in my Option
Agreement accompanies this notice.
I hereby authorize payroll withholding and otherwise will make adequate
provision for foreign, federal, state and local tax withholding obligations,
if any, as more fully set forth in my Option Agreement.
I understand that the Shares are being purchased pursuant to the terms
of the IKOS Systems, Inc. 1995 Outside Directors Stock Option Plan and my
Option Agreement, copies of which I have received and carefully read and
understand.
Date of Exercise:
---------------------------
Date of Option Agreement:
-------------------
Shares Being Purchased:
---------------------
Price per Share: $
--------------------------
-------------------------------
Signature
-------------------------------
Print Name
-------------------------------
Social Security Number
-------------------------------
Address
-------------------------------
<PAGE>
IKOS SYSTEMS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(ANNUAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (ANNUAL
OPTION) (the "Option Agreement") is made and entered into as of ____________,
199_, by and between IKOS Systems, Inc. and _________________ (the "Optionee").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "Option").
1. Definitions and Construction.
----------------------------
1.1 Definitions. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "Date of Option Grant" means ______________, 199_.
(b) "Number of Option Shares" means two thousand five hundred
(2,500) shares of Stock, as adjusted from time to time pursuant to Section
9.
(c) "Exercise Price" means $ _______ per share of Stock,
as adjusted from time to time pursuant to Section 9.
(d) "Initial Exercise Date" means the day immediately preceding
the date of the fourth (4th) annual meeting of the stockholders of the Company
occurring after the Date of Option Grant.
1
<PAGE>
(e) "Vested Percentage" means, on any relevant date, the
percentage determined as follows:
Vested Percentage
-----------------
Prior to the Initial Exercise Date 0%
On Initial Exercise Date, 100%
provided the Optionee's Service
is continuous from the Date of
Option Grant until the Initial
Exercise Date
(f) "Option Expiration Date" means the date ten (10) years
after the Date of Option Grant.
(g) "Board" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the
Plan, "Board" shall also mean such Committee(s).
(h) "Code" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(i) "Committee" means a committee of the Board duly appointed
to administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to amend or terminate the Plan
at any time, subject to the terms of the Plan and any applicable limitations
imposed by law.
(j) "Company" means IKOS Systems, Inc., a Delaware corporation, or
any successor corporation thereto.
(k) "Consultant" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee
or a Director.
(l) "Director" means a member of the Board or of the board
of directors of any other Participating Company.
(m) "Disability" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the
major duties of the Optionee's position with the Participating Company Group
because of the sickness or injury of the Optionee.
(n) "Employee" means any person treated as an employee (including
an officer or a Director who is also treated as an employee) in the
2
<PAGE>
records of Participating Company; provided, however, that neither service
as a Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(o) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(p) "Fair Market Value" means, as of any date, if there is
then a public market for the Stock, the closing price of the Stock (or the
mean of the closing bid and asked prices of the Stock if the Stock is so
reported instead) as reported on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System, the NASDAQ National Market
System or such other national or regional securities exchange or market
system constituting the primary market for the Stock. If the relevant date
does not fall on a day on which the Stock is trading on NASDAQ, the NASDAQ
National Market System or other national or regional securities exchange
or market system, the date on which the Fair Market Value shall be established
shall be the last day on which the Stock was so traded prior to the relevant
date. If there is then no public market for the Stock, the Fair Market Value
on any relevant date shall be as determined by the Board without regard
to any restriction other than a restriction which, by its terms, will never
lapse.
(q) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "Participating Company Group" means, at any point in time,
all corporations collectively which are then Participating Companies.
(t) "Plan" means the IKOS Systems, Inc. 1995 Outside Directors
Stock Option Plan.
(u) "Rule 16b-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or
regulation.
(v) "Securities Act" means the Securities Act of 1933, as amended.
(w) "Service" means the Optionee's service with the Participating
Company Group, whether in the capacity of an Employee, a Director or a
Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders
Service to the Participating Company Group or a change in the Participating
Company for which the Optionee renders such Service, provided that there
is no interruption or
3
<PAGE>
termination of the Optionee's Service. The Optionee's Service shall be deemed to
have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(x) "Stock" means the common stock, par value $0.01, of the
Company, as adjusted from time to time in accordance with Section 9.
(y) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. Tax Status of the Option. This Option is intended to be a nonstatutory
------------------------
stock option and shall not be treated as an incentive stock option within the
meaning of Section 422(b) of the Code.
3. Administration. All questions of interpretation concerning this Option
--------------
Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. Exercise of the Option.
----------------------
4.1 Right to Exercise.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares multiplied by the Vested Percentage less the number of shares
previously acquired upon exercise of the Option. In no event shall the Option be
exercisable for more shares than the Number of Option Shares.
(b) Notwithstanding the foregoing, in the event that the adoption
of the Plan or any amendment of the Plan is subject to the approval of the
Company's stockholders in order for the Plan or the grant of the Option to
comply with the requirements of Rule 16b-3, the Option shall not be exercisable
prior to such stockholder approval.
4
<PAGE>
4.2 Method of Exercise. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased. The
Option shall be deemed to be exercised upon receipt by the Company of such
written notice and the aggregate Exercise Price.
4.3 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value not less than the
aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in
Section 4.3(c), or (iv) by an combination of the foregoing.
(b) Tender of Stock. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) Cashless Exercise. A "Cashless Exercise" means the assignment
in a form acceptable to the Company of the proceeds of a sale or loan with
respect to some or all of the shares of Stock acquired upon the exercise of the
Option pursuant to a program or procedure approved by the Company (including,
without limitation, through an exercise complying with the provisions of
Regulation T as promulgated from time to time by the Board of Governors of the
Federal Reserve System). The Company reserves, at any and all times, the right,
in the Company's sole and absolute discretion, to decline to approve or
terminate any such program or procedure.
4.4 Tax Withholding. At the time the Option in exercised, in whole or
in part, or at any time thereafter as requested by the Company, the Optionee
agrees to make adequate provision for any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Participating
Company
5
<PAGE>
Group, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part,
of the Option, (ii) the transfer, in whole or in part, of any shares acquired
upon exercise of the Option, or (iii) the lapsing of any restriction with
respect to any shares acquired upon exercise of the Option. The Optionee
is cautioned that the Option is not exercisable unless the tax withholding
obligations of the Participating Company Group are satisfied. Accordingly,
the Optionee may not be able to exercise the Option when desired even though
the Option is vested, and the Company shall have no obligation to issue
a certificate for such shares.
4.5 Certificate Registration. Except in the event the Exercise
Price is paid by means of a Cashless Exercise, the certificate for the shares
as to which the Option is exercised shall be registered in the name of the
Optionee, or, if applicable, the heirs of the Optionee.
4.6 Restrictions on Grant of the Option and Issuance of Shares.
The grant of the Option and the issuance of shares of Stock upon exercise
of the Option shall be subject to compliance with all applicable requirements
of federal, state or foreign law with respect to such securities. The Option
may not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange
or market system upon which the Stock may then be listed. In addition, the
Option may not be exercised unless (i) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (ii) in the
opinion of legal counsel to the Company, the shares issuable upon exercise
of the Option may be issued in accordance with the terms of an applicable
exemption from the registration requirements of the Securities Act. THE OPTIONEE
IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING
CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE
THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability
of the Company to obtain from any regulatory body having jurisdiction the
authority, if any, deemed by the Company's legal counsel to be necessary
to the lawful issuance and sale of any shares subject to the Option shall
relieve the Company of any liability in respect of the failure to issue
or sell such shares as to which such requisite authority shall not have
been obtained. As a condition to the exercise of the Option, the Company
may require the Optionee to satisfy any qualifications that may be necessary
or appropriate, to evidence compliance with any applicable law or regulation
and to make any representation or warranty with respect thereto as may be
requested by the Company.
4.7 Fractional Shares. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. Nontransferability of the Option. The Option may be exercised
--------------------------------
during the lifetime of the Optionee only by the Optionee or the Optionee's
guardian or
6
<PAGE>
legal representative and may not be assigned or transferred in any manner
except by will or by the laws of descent and distribution. Following the
death of the Optionee, the Option, to the extent provided in Section 7,
may be exercised by the Optionee's legal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.
6. Termination of the Option. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date,
(b) the last date for exercising the Option following termination of the
Optionee's Service as described in Section 7, or (c) a Transfer of Control
to the extent provided in Section 8.
7. Effect of Termination of Service.
--------------------------------
7.1 Option Exercisability.
(a) Disability. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the
expiration of twelve (12) months after the date on which the Optionee's
Service terminated, but in any event no later than the Option Expiration
Date.
(b) Death. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option,
to the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's
legal representative or other person who acquired the right to exercise
the Option by reason of the Optionee's death) at any time prior to the
expiration of twelve (12) months after the date on which the Optionee's
Service terminated, but in any event no later than the Option Expiration
Date. The Optionee's Service shall be deemed to have terminated on account
of death if the Optionee dies within three (3) months after the Optionee's
termination of Service.
(c) Other Termination of Service. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable
by the Optionee on the date on which the Optionee's Service terminated,
may be exercised by the Optionee within twelve (12) months after the date
on which the Optionee's Service terminated, but in any event no later than
the Option Expiration Date.
7.2 Extension if Exercise Prevented by Law. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods
set forth in Section 7.1 is prevented by the provisions of Section 4.6,
the Option shall remain exercisable until three (3) months after the date
the Optionee is notified by
7
<PAGE>
the Company that the Option is exercisable, but in any event no later than
the Option Expiration Date.
7.3 Extension if Optionee Subject to Section 16(b). Notwithstanding
the foregoing, if a sale, within the applicable time periods set forth in
Section 7.1, of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit or (ii) the Option Expiration Date.
8. Ownership Change and Transfer of Control.
----------------------------------------
8.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the stockholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(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.
(b) A "Transfer of Control" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"Transaction") wherein the stockholders of the Company immediately before
the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the
Company's voting stock immediately before the Transaction, direct or indirect
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the corporation
or corporations to which the assets of the Company were transferred (the
"Transferee Corporation(s)"), as the case may be. For purposes of the preceding
sentence, indirect beneficial ownership shall include, without limitation,
an interest resulting from ownership of the voting stock of one or more
corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through
one or more subsidiary corporations. The Board shall have the right to
determine whether multiple sales or exchanges of the voting stock of the
Company or multiple Ownership Change Events are related, and its determination
shall be final, binding and conclusive.
8
<PAGE>
8.2 Effect of Transfer of Control on Option. In the event of a
Transfer of Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the
date of the Transfer of Control. Any exercise of the Option that was
permissible solely by reason of this Section 8.2 shall be conditioned upon
the consummation of the Transfer of Control. In addition, the surviving,
continuing, successor, or purchasing corporation or parent corporation thereof,
as the case may be (the "Acquiring Corporation"), may either assume the
Company's rights and obligations under the Option or substitute for the
Option a substantially equivalent option for the Acquiring Corporation's
stock. The Option shall terminate and cease to be outstanding effective
as of the date of the Transfer of Control to the extent that the Option
is neither assumed or substituted for by the Acquiring Corporation in
connection with the Transfer of Control nor exercised as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect
to such shares shall continue to be subject to all applicable provisions
of this Option Agreement except as otherwise provided herein. Furthermore,
notwithstanding the foregoing, if the corporation the stock of which is
subject to the Option immediately prior to an Ownership Change Event described
in Section 8.1(a)(i) constituting a Transfer of Control is the surviving
or continuing corporation and immediately after such Ownership Change Event
less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a)
of the Code without regard to the provisions of Section 1504(b) of the Code,
the Option shall not terminate.
9. Adjustments for Changes in Capital Structure. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification, or similar change in the capital structure
of the Company, appropriate adjustments shall be made in the number, Exercise
Price and class of shares of stock subject to the Option. If a majority
of the shares which are of the same class as the shares that are subject
to the Option are exchanged for, converted into, or otherwise become (whether
or not pursuant to an Ownership Change) shares of another corporation (the
"New Shares"), the Board may unilaterally amend the Option to provide that
the Option is exercisable for New Shares. In the event of any such amendment,
the Number of Option Shares and the Exercise Price shall be adjusted in
a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting
from an adjustment pursuant to this Section 9 shall be rounded down to the
nearest whole number, and in no event may the Exercise Price be decreased
to an amount less than the par value, if any, or the stock subject to the
Option.
10. Rights as a Stockholder. The Optionee shall have no rights as
-----------------------
a stockholder with respect to any shares covered by the Option until the
date of the issuance of a certificate for the shares for which the Option
has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly
9
<PAGE>
authorized transfer agent of the Company). No adjustment shall be made for
dividends, distributions or other rights for which the record date is prior
to the date such certificate is issued, except as provided in Section 9.
11. Legends. The Company may at any time place legends referencing
-------
any applicable federal, state or foreign securities law restrictions on
all certificates representing shares of stock subject to the provisions
of this Option Agreement. The Optionee shall, at the request of the Company,
promptly present to the Company any and all certificates representing shares
acquired pursuant to the Option in the possession of the Optionee in order
to carry out the provisions of this Section.
12. Binding Effect. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
13. Termination or Amendment. The Board may terminate or amend the
------------------------
Plan or the Option at any time; provided, however, that no such termination
or amendment may adversely affect the Option or any unexercised portion
hereof without the consent of the Optionee unless such termination or amendment
is necessary to comply with any applicable law or government regulation.
No amendment or addition to this Option Agreement shall be effective unless
in writing.
14. Integrated Agreement. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company
Group with respect to the subject matter contained herein, and there are
no agreements, understandings, restrictions, representations, or warranties
among the Optionee and the Participating Company Group with respect to such
subject matter other than those as set forth or provided for herein. To
the extent contemplated herein, the provisions of this Option Agreement
shall survive any exercise of the Option and shall remain in full force
and effect.
10
<PAGE>
15. Applicable Law. This Option Agreement shall be governed by the
--------------
laws of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the
State of California.
IKOS SYSTEMS, INC.
By:
----------------------------------
Title:
-------------------------------
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement and hereby accepts the Option subject
to all of the terms and provisions thereof. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations
of the Board upon any questions arising under this Option Agreement.
OPTIONEE
Date:
-------------------------------- -------------------------------------
11
<PAGE>
NONSTATUTORY STOCK OPTION
NOTICE OF EXERCISE
To: Chief Financial Officer
IKOS Systems, Inc.
I hereby exercise my Option to purchase the number of shares (the
"Shares") of Common Stock of IKOS Systems, Inc. (the "Company") set forth
below. Full payments for the Shares in the manner set forth in my Option
Agreement accompanies this notice.
I hereby authorize payroll withholding and otherwise will make adequate
provision for foreign, federal, state and local tax withholding obligations,
if any, as more fully set forth in my Option Agreement.
I understand that the Shares are being purchased pursuant to the terms
of the IKOS Systems, Inc. 1995 Outside Directors Stock Option Plan and my
Option Agreement, copies of which I have received and carefully read and
understand.
Date of Exercise:
------------------------
Date of Option Agreement:
----------------
Shares Being Purchased:
------------------
Price per Share: $
-----------------------
-------------------------------------
Signature
-------------------------------------
Print Name
-------------------------------------
Social Security Number
-------------------------------------
Address
-------------------------------------
<PAGE>
EXHIBIT A
---------
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is made and entered into by and between IKOS
Systems, Inc. (the "Company") and Ramon Nunez ("Nunez") as of Sept. 27, 1994.
1. Position and Duties: Nunez shall be employed by the Company as its
-------------------
President and Chief Operating Officer ("COO") reporting to the Company's Chief
Executive Officer ("CEO"), effective October 1, 1994 (the "Commencement Date").
As President and COO, Nunez agrees to devote his full business time, energy and
skill to his duties at the Company. These duties shall include, but not be
limited to, any duties consistent with his position which may be assigned to
Nunez from time to time by the Company's CEO.
The Company shall use its best efforts to have Nunez nominated and elected
to the Board of Directors of the Company (the "Board").
After Nunez serves as President and COO of the Company for a time
determined to be appropriate by the CEO and the Company's Board of Directors
(the "Board"), he may be promoted to the position of chief executive officer of
the Company but only if and when the Board and the CEO, in their sole
discretion, deem appropriate.
2. Term of Employment: Nunez' employment with the Company pursuant to this
------------------
Agreement is for no specified term, and may be terminated by the Company or
Nunez at any time, with or without cause. Upon the termination of Nunez'
employment with the Company, for any reason, neither Nunez nor the Company shall
have any further obligation or liability to the other, except as set forth in
paragraphs 4, 5, 7 and 8 below.
3. Compensation: Nunez shall be compensated by the Company for his
------------
services as follows:
(a) (i) Salary: As President and COO, Nunez shall be paid a monthly
------
salary of $12,583.33 ($151,000.00 on an annualized basis), subject to applicable
withholding, in accordance with the Company's normal payroll procedures. Such
salary shall be reviewed as determined appropriate by the CEO. As COO, Nunez
shall have the opportunity to earn up to $6,000.00 per quarter, less
withholding, if Nunez achieves the quarterly objectives established for him by
the Company. Shortly after executing this Agreement, Nunez and the Company's CEO
shall establish and agree upon such quarterly objectives.
(ii) If Nunez is promoted to chief executive officer, Nunez shall
be paid a monthly salary of $16,250.00 ($195,000.00 on an annualized basis),
subject to applicable withholding, in accordance with the Company's normal
payroll procedures. Such salary shall be reviewed as determined appropriate by
the Board.
1
<PAGE>
(b) Benefits: Whether Nunez is serving the Company as its COO or as
--------
its chief executive officer, he shall have the right, on the same basis as other
members of senior management of the Company, to participate in and to receive
benefits under any of the Company's employee benefit plans, including the
medical, dental, vision and disability group insurance plans. Nunez shall also
be entitled to participate in the 401(k) Plan maintained by the Company in
accordance with its terms. In addition, Nunez shall be entitled to the benefits
afforded to other members of senior management under the Company's vacation,
holiday and business expense reimbursement policies.
(c) Stock Options:
-------------
(i) Upon execution of this Agreement, Nunez shall be granted a
nonqualified stock option to purchase 300,000 shares of the Company's Common
Stock at an exercise price equal to the fair market value of the Company's
Common Stock as determined by the Board as of the date of grant. The shares
subject to this option shall vest as follows: (i) upon six (6) months'
anniversary of this Agreement, 12.5%; (ii) during the next forty-two (42) month
period, 2.083% per month. The options shall be subject to the terms and
conditions of the Company's stock option plan and the Company's standard form of
stock option agreement.
(ii) If the Company achieves its earnings per share objective as
set forth in the Company's annual business plan approved by the Board, Nunez
shall be granted additional stock options to purchase shares according to the
following chart:
<TABLE>
<CAPTION>
Earnings Per Share Objectives
% of Plan Number of Shares
----------------------------------------- ----------------------
<S> <C>
90% of Earnings Per Share Attained 0
91% of Earnings Per Share Attained 2,500
92% of Earnings Per Share Attained 5,000
93% of Earnings Per Share Attained 7,500
94% of Earnings Per Share Attained 10,000
95% of Earnings Per Share Attained 12,500
96% of Earnings Per Share Attained 15,000
97% of Earnings Per Share Attained 17,500
98% of Earnings Per Share Attained 20,000
99% of Earnings Per Share Attained 22,500
100% of Earnings Per Share Attained 25,000
</TABLE>
(iii) In addition to the above, for every 4c earnings per
share that the Company achieves over its objectives, Nunez shall be granted
additional stock options to purchase 10,000 shares. The stock options earned
by Nunez under this subparagraph (iii) will vest as follows: 8.3333% per month.
The exercise price for these options shall be equal to the fair market value of
the Company's Common Stock determined by the Board as of their date of grant.
These options shall be subject to the terms and
2
<PAGE>
conditions of the Company's stock option plan and the Company's standard
form of stock option agreement.
Up to forty percent (40%) of the stock options referred to in
subparagraphs (ii) and (iii) above shall be earned in the first half of
the applicable fiscal year and up to sixty percent (60%) shall be earned
in the second half of the applicable fiscal year.
(d) Performance Bonus. Nunez shall have the opportunity to earn
-----------------
an annual Performance Bonus. As President and COO, Nunez may earn an annual
Performance Bonus of up to $80,000,000 per year. The Performance Bonus shall
have two components: (i) 80% of the Performance Bonus may be earned on the
basis of revenue objectives and earnings per share; and (ii) 20% of the
Performance Bonus is discretionary and will be granted based upon Nunez'
job performance and other factors as determined by the CEO and the Board.
The Performance Bonus shall be determined as follows:
(i) Based upon the achievement of the Company's revenue
objectives and earnings per share objectives pursuant to and measured against
its annual business plan, as approved by the Board, Nunez shall have the
opportunity to earn up to 80% of the annual Performance Bonus ($64,000)
as follows:
A. Up to 50% of this component ($32,000) may be earned
if the Company achieves its revenue objectives for the Company's fiscal
year as set forth in the Company's annual business plan according to the
following chart:
<TABLE>
<CAPTION>
Revenue Objectives Bonus Earned
% of Plan % of $32,000
------------------------- ----------------
<S> <C>
90% of Revenues Attained 0% Earned
91% of Revenues Attained 10% Earned
92% of Revenues Attained 20% Earned
93% of Revenues Attained 30% Earned
94% of Revenues Attained 40% Earned
95% of Revenues Attained 50% Earned
96% of Revenues Attained 60% Earned
97% of Revenues Attained 70% Earned
98% of Revenues Attained 80% Earned
99% of Revenues Attained 90% Earned
100% of Revenues Attained 100% Earned
</TABLE>
Up to forty percent (40%) of the Performance Bonus amount referred
to above (12,800), shall be earned in the first half of the applicable fiscal
year and up to sixty percent (60%) of the Performance Bonus amount referred
to above ($19,200), shall be earned in the second half of the applicable
fiscal year. Notwithstanding the above, if the objectives are not achieved
in the first half of the fiscal year, such objectives may not be recouped
in the second half of the fiscal year.
3
<PAGE>
B. Up to 50% of this component ($32,000) may be earned
if the Company achieves its earnings per share objectives for the Company's
fiscal year as set forth in the Company's annual business plan according
to the following chart:
<TABLE>
<CAPTION>
Earnings per Share Objectives Bonus Earned
% of Plan % of $32,000
----------------------------- ----------------
<S> <C>
90% of Earnings Attained 0% Earned
91% of Earnings Attained 10% Earned
92% of Earnings Attained 20% Earned
93% of Earnings Attained 30% Earned
94% of Earnings Attained 40% Earned
95% of Earnings Attained 50% Earned
96% of Earnings Attained 60% Earned
97% of Earnings Attained 70% Earned
98% of Earnings Attained 80% Earned
99% of Earnings Attained 90% Earned
100% of Earnings Attained 100% Earned
</TABLE>
Up to forty percent (40%) of the Bonus amount referred to above ($12,800)
shall be earned in the first half of the applicable fiscal year and up to
sixty percent (60%) of the Bonus amount referred to above ($19,200) shall
be earned in the second half of the applicable fiscal year. Notwithstanding
the above, if the objectives are not achieved in the first half of the fiscal
year, such objectives may not be recouped in the second half of the fiscal
year.
(ii) Nunez shall have the opportunity to earn up to 20% of the
annual Performance Bonus ($16,000) based upon achievement of his job performance
and other duties. Such component of the annual Performance Bonus shall be
payable at the sole discretion of the chairman of the Board and the Board's
Compensation Committee. Up to forty percent (40%) of the Bonus amount referred
to in this subparagraph (ii) ($6,400) may be earned in the first half of
the applicable fiscal year and up to sixty percent (60%) ($9,600) may be
earned in the second half of the applicable fiscal year.
(iii) The Performance Bonus, if any, to be paid to Nunez pursuant
to this paragraph (d) shall be paid to Nunez in a lump sum payment no later
than thirty days following the completion of the first half of the Company's
fiscal year and no later than thirty days following the completion of the
second half of the Company's fiscal year.
(iv) In the event that Nunez is promoted to the position of chief
executive officer of the Company, he will be entitled to earn an annual
Performance Bonus of up to $100,000 per year, beginning on the date of his
promotion. The formulae described in subparagraphs (i), (ii) and (iii) above
shall be modified accordingly to take into consideration this increase in
the amount of the Performance Bonus.
4
<PAGE>
(v) Nunez shall not participate in the profit sharing plan that
is available to other officers of the Company.
4. Benefits Upon Voluntary Termination: In the event that Nunez
-----------------------------------
voluntarily resigns from his employment with the Company, or in the event that
Nunez' employment terminates as a result of his death or disability, Nunez shall
be entitled to no compensation or benefits from the Company other than those
earned under paragraph 3 above through the date of his termination.
5. Benefits Upon Other Termination: Nunez agrees that his employment may
-------------------------------
be terminated by the Company at any time, with or without cause. In the event of
the termination of Nunez' employment by the Company for the reasons set forth
below, he shall be entitled to the following:
(a) Termination for Cause: If Nunez' employment is terminated by the
---------------------
Company for cause as defined below, Nunez shall be entitled to no compensation
or benefits from the Company other than those earned under paragraph 3 through
the date of his termination.
For purposes of this Agreement, a termination "for cause" occurs
if Nunez is terminated for any of the following reasons:
(i) theft, dishonesty, or falsification of any employment or
Company records;
(ii) improper disclosure of the Company's confidential or
proprietary information;
(iii) any intentional act by Nunez which has a material
detrimental effect on the Company's reputation or business; or
(iv) any material breach of this Agreement, which breach is not
cured within thirty (30) days following written notice of such breach from the
Company.
(b) Termination for Other Than Cause: If Nunez' employment is
--------------------------------
terminated by the Company for any reason other than cause, Nunez shall be
entitled to the following separation benefits:
(i) payment of a monthly amount for nine months and such monthly
payment shall change from month to month as it shall be equal to Nunez' average
monthly income that he received over the last twelve (12) months. Such average
monthly income shall take into account all compensation that Nunez received from
the Company;
(ii) continued vesting in any unvested shares of the Company's
stock which were granted to Nunez pursuant to the stock options described in
subparagraph 3(c) above; and
5
<PAGE>
(iii) continued provision of the employee benefits described in
paragraphs 3(b) for a period of nine (9) months following such termination.
(c) Termination Due to an Ownership Change and/or a Transfer of
-----------------------------------------------------------
Control. In the event of an Ownership Change and/or a Transfer of Control as
-------
defined in the agreement dated June 2, 1994 and attached hereto as Exhibit A
---------
(hereinafter the "Transfer of Control Agreement") and Nunez' employment with the
Company is terminated by the Company or by Nunez for the reasons set forth in
the Transfer of Control Agreement, Nunez shall only be entitled to the benefits
set forth therein.
6. Exclusive Remedy: Subject to paragraph 5 above, Nunez shall be entitled
----------------
to no further compensation for any damage or injury arising out of the
termination of his employment by the Company.
7. Confidential Information and Inventions Agreement: Nunez agrees to
-------------------------------------------------
abide by the terms and conditions of the Company's standard employee
Confidential Information and Inventions Agreement that was executed by Nunez and
attached hereto.
8. Conflict of Interest: Nunez agrees that for a period of two (2) years
--------------------
after termination of his employment with the Company, he will not, directly or
indirectly, solicit the services of or in any other manner persuade an employee
or customers of the Company to discontinue the person's relationship with or to
the Company as an employee or customer, as the case may be.
9. Attorney's Fees: The prevailing party shall be entitled to recover from
---------------
the losing party its attorneys' fees and costs incurred in any action brought to
enforce any arising out of this Agreement.
10. Interpretation: Nunez and the Company agree that this Agreement shall
--------------
be interpreted in accordance with and governed by the laws of the State of
California.
11. Successors and Assigns: This Agreement shall inure to the benefit of
----------------------
and be binding upon the Company and its successors and assigns. In view of the
personal nature of the services to be performed under this Agreement by Nunez,
he shall not have the right to assign or transfer any of his rights, obligations
or benefits under this Agreement, except as otherwise noted herein.
12. Entire Agreement: This Agreement constitutes the entire employment
----------------
agreement between Nunez and the Company regarding the terms and conditions of
his employment, with the exception of (i) the confidentiality and inventions
agreement described in paragraph 7, (ii) any stock option agreement between
Nunez and the Company and (iii) the Transfer of Control Agreement attached
hereto as Exhibit A. This Agreement supersedes all prior negotiations,
---------
representations or agreements between Nunez and the Company, whether written or
oral, concerning Nunez' employment by the Company.
6
<PAGE>
13. No Representations: Nunez acknowledges that he is not relying,
------------------
and has not relied, on any promise, representation or statement made by
or on behalf of the Company which is not set forth in this Agreement.
14. Validity: If any one or more of the provisions (or any part thereof)
--------
of this Agreement shall be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
(or any part thereof) shall not in any way be affected or impaired thereby.
15. Modification: This Agreement may only be modified or amended by
------------
a supplemental written agreement signed by Nunez and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year written below.
IKOS SYSTEMS, INC.
Date: 9/27/94 By: /s/ Gerald S. Casilli
------------------------------- ----------------------------------
Its: Chairman & CEO
---------------------------------
Date: 9/27/94 /s/ Ramon Nunez
------------------------------- -------------------------------------
Ramon Nunez
<PAGE>
IKOS Systems/Precedence
Development and OEM Agreement
for Verilog/IKOS Co-simulation Interface
THIS AGREEMENT ("Agreement"), effective this 26th day of August, 1994, is
made by and between Precedence Incorporated ("Precedence"), a California
corporation with its principal place of business located at 4675 Stevens Creek
Blvd. Suite 250, Santa Clara, CA 95051, and IKOS Systems Incorporated ("IKOS"),
a California corporation with its principal place of business located at 19050
Pruneridge Ave., Cupertino, CA 95014.
RECITAL OF PURPOSE
WHEREAS, Precedence is engaged in the development, manufacturing and sale
of certain computer software relating to the integration of simulators into
Verilog-XL, a proprietary product of Cadence;
WHEREAS, IKOS desires to utilize Precedence SimMatrix technology, software
and cooperation to develop a software simulation interface permitting IKOS'
hardware accelerator products to operate with Verilog-XL; and
WHEREAS, IKOS desires the right to distribute the software simulation
interface based on Precedence SimMatrix to end-users in connection with the
distribution of IKOS hardware accelerator products;
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "INTERFACE" shall mean the Precedence proprietary simulation interface
software between the IKOS Integration Software and Cadence Verilog-XL,
based on Precedence SimMatrix and any related manuals, documentation or
other written materials pursuant to this Agreement as further described in
the attached Exhibit A.
1.2 "IKOS INTEGRATION SOFTWARE" shall mean the IKOS proprietary software,
including SimLink and other interface software, which enables the IKOS
Products to work with the Precedence Interface.
1.2 "IKOS PRODUCTS" shall mean IKOS' simulators currently supported by
SimLink: specifically SoNsim, Nsim and the 2X00 hardware series.
1.3 "DEVELOPMENT ENVIRONMENT" shall mean Precedence's proprietary integration
software and documentation used by IKOS as an aid in their enhancement of
SimLink and other code to support the Interface. It includes documentation
that describes the procedural interface that IKOS will use to communicate
with the Interface.
2. INTERFACE DEVELOPMENT AND TESTING.
2.1 DEVELOPMENT: IKOS shall develop the IKOS Integration Software and
Precedence shall develop the Interface. There shall be two phases of
development with associated scheduled milestones and payments as set forth
in Exhibit B. IKOS integration
<PAGE>
Software and interface development shall be done in accordance with the
specifications provided in Exhibit A.
2.2 PRECEDENCE PHASE 1 RESPONSIBILITIES: Precedence shall provide a
specification, a Development Environment on Sun for the IKOS Simulation
Products, for the duration of Phase 1, and one week of engineering
consulting services, free of any additional charges. If additional
engineering consulting services are requested by IKOS, Precedence shall
make reasonable efforts to provide such services at a discounted
consulting rate of $1,000 per diem. IKOS shall use the Development
Environment solely to develop the IKOS Integration Software and to test
the Integration Software and the Interface.
2.3 IKOS PHASE 1 RESPONSIBILITIES: IKOS shall pay $10K to Precedence to begin
Phase 1. IKOS shall provide engineering integration effort to complete
Phase 1 and arrive at the acceptance milestone.
2.4 IKOS PHASE 2 RESPONSIBILITIES: IKOS shall purchase from Precedence 4
resellable licenses for the Interface at $17,250 per copy for a total of
$69,000 at the start of Phase 2 as shown in Exhibit B. IKOS shall purchase
from Precedence an additional 4 resellable licenses for the Interface at
$17,250 per copy for a total of $69,000 at the earlier of Beta Ship date
for the Interface, or October 3, 1994. IKOS shall provide engineering
integration effort to reach Beta Ship date.
2.5 PRECEDENCE PHASE 2 RESPONSIBILITIES: Precedence shall provide the
SimMatrix simulation backplane technology and 1 additional week of
engineering consulting free of any additional charges. Precedence shall
provide template documentation for the Interface. Precedence shall provide
maintenance of the Integration Toolkit, new releases of the SimMatrix for
Verilog on same schedule as for released products.
2.6 PLATFORMS: The Interface and the SimMatrix Verilog Development Environment
from Precedence shall support the Sun SPARC platform. Precedence shall
also port to HP and deliver the SimMatrix Verilog Development Environment
and the Interface. IKOS shall do testing and QA of the Interface on the HP
platform. IKOS understands that the normal porting fee of $30,000 has been
waived for the HP platform only. IKOS shall obtain and provide to
Preference one HP EISA bus driver PCB for Precedence use (at an estimated
cost of $2,000), at least 8 weeks before IKOS desires the delivery of the
HP port. If or when Precedence makes a corporate decision to port to
Solaris, IKOS shall be provided the Development Environment on Solaris
free of charge. At IKOS' option, IKOS may ensure or expedite the port to
Solaris for an additional payment of $10,000.
2.7 TECHNICAL COOPERATION: IKOS shall provide to Precedence two non-exclusive,
no-charge licenses to use IKOS' software, in object form only, and, one
appropriately configured hardware accelerator for purposes of developing,
testing and supporting the Interface.
Precedence shall provide to IKOS three non-exclusive, no-charge licenses
to use the Interface internally for the purposes of engineering, test and
support.
Upon termination of this Agreement, except as specified in section 9, each
party shall return to the other party all copies of the other party's
software and any hardware provided pursuant to this paragraph 2.7.
2.8 TESTING AND ACCEPTANCE: IKOS shall, during Phase 1, determine acceptance
of the Development Environment and Interface through feasibility analysis
and testing. If, before the end of Phase 1, IKOS fails to give written
notice to Precedence of the ways
<PAGE>
in which the Interface does not pass such tests, then the Interface shall
be deemed accepted by IKOS. Upon any notification by IKOS that the
Interface does not meet the acceptance tests, Precedence shall have thirty
(30) days after its receipt of such notice to correct the Interface so
that acceptance tests are met. In each instance, IKOS shall then have two
(2) weeks to retest the Interface to ensure that the Interface passes the
acceptance tests. If, after such period, the Interface does not pass the
tests, IKOS shall have the option of canceling this Agreement, or IKOS and
Precedence shall mutually agree upon a revised schedule as to enable
acceptance of the Interface. In the latter case, this Agreement shall
remain in full force and effect, and date of October 3, 1994 in Section
2.4 shall be extended into the future by the same number of days as the
revised, mutually agreed upon schedule.
3. NON-EXCLUSIVE LICENSE.
3.1 GRANT OF LICENSE: Precedence hereby grants to IKOS a non-exclusive, non-
transferable, world-wide license to use, market, or distribute all or any
part of the Interface, including user documentation. This license includes
the right for IKOS to duplicate, reproduce, use, display, market and
distribute to end-users, the Interface on magnetic or optical recording
media, in machine executable object code format only. This license further
includes the right for IKOS to duplicate, reproduce, use, display, market
and distribute to end-users any manuals, documentation or other written
materials relating to the Interface and developed by Precedence pursuant
to this Agreement, as written hard copy or on magnetic or optical
recording media. IKOS' license to distribute the Interface shall include
the right to distribute indirectly through IKOS' usual channels, including
OEMs, VARs, dealers and agents, subject to the restrictions set forth in
this Agreement.
4. END-USER LICENSE.
4.1 IKOS shall use reasonable commercial efforts, but no less effort than that
applied to other IKOS products, to license the Interface to the greatest
number of end-users and to implement the sales and marketing plans as
described in Exhibit E. Any distribution by IKOS of the Interface shall
only be under sublicense to any end-user, and such sublicense shall not
give a sublicensee any greater rights to the Interface than IKOS itself
enjoys. IKOS shall license the Interface to end-users, including for
evaluation purposes, under terms and conditions substantially in the form
of the attached Exhibit C. Such end-user license shall include ninety (90)
days of Interface maintenance and support at no cost to end-users.
5. SUPPORT AND TRAINING.
5.1 IKOS SUPPORT: IKOS shall provide front line support to end-users of the
Interface. Such support shall include telephone support during normal
working hours as is reasonably necessary to verify and correct reported
defects or errors. For purposes of this Agreement, an "error" shall mean
performance by the Interface contrary to the performance predicted in
Exhibit A.
Procedure: If customers notify IKOS of a suspected error, IKOS shall log
the call in the IKOS Customer Support database, call the Customer directly
and make reasonable efforts to investigate, verify and correct the
reported defect or error; provide a workaround if available; and track the
error in the IKOS Customer Support database. If the problem is determined
to be related to IKOS technology, IKOS Customer Support handles
completely. If the problem is determined to be related to Precedence
technology, IKOS Customer Support shall report to Precedence Customer
Support contact immediately via Email; forwarding a test case and
description of the error.
<PAGE>
Precedence shall use reasonable efforts to log the error with cross
reference, investigate and report status or fix back to IKOS.
5.2 PRECEDENCE SUPPORT: Precedence shall provide secondary technical support
to assist IKOS in correcting reported defects or errors in the Interface.
Such secondary support shall be undertaken after IKOS has made reasonable
attempts to verify and correct the reported defects or errors.
Precedence and IKOS shall also generate bug reports/resolutions from their
respective Customer Support databases as each bug is discovered or monthly
to the other party as a status update.
5.3 UPDATES: Precedence shall also periodically provide to IKOS updates to the
Interface to adjust for changes in computer operating system versions or
Verilog-XL versions. All such updates shall be made available to IKOS by
Precedence within sixty (60) days of production release of the new
Verilog-XL version. IKOS shall ship out new Software and Documentation
received from Precedence to co-simulation end users who are on
maintenance, for all new releases, in a timely fashion.
5.4 TRAINING: Precedence shall develop and provide one, one-day Interface
Training class for the co-simulation Interface free of charge to IKOS.
IKOS shall then generally provide customer training to end users of the
Interface. Should IKOS desire additional training classes by Precedence,
they shall be provided pursuant to the terms, conditions and fees
described in Exhibit D.
6. PAYMENT
6.1 FEES AND ROYALTIES: In consideration of the rights and licenses granted
herein, IKOS agrees to pay to Precedence License Fees and Maintenance Fees
for copies of the Interface licensed to end-users, in the amount and
according to the terms provided in the attached Exhibit D.
IKOS shall pay all License Fees in United States dollars immediately upon
coming due based upon a date specified within this Agreement, or if no
date is specified within 30 days of the date of invoice from Precedence.
Maintenance fee payments shall be due thirty (30) days after the end of
the quarter in which support was provided.
6.2 REPORTING OBLIGATIONS OF IKOS: During the term of this Agreement and for a
period of two (2) years thereafter, IKOS shall keep complete and accurate
written books, accounts and records of such information as may be
necessary to determine its compliance with the terms and conditions of
this Agreement. Within a maximum of five (5) days after the delivery of
each purchased Interface sublicense or evaluation Interface sublicense,
IKOS shall supply to Precedence at least the following information with
respect to each: (a) the name and address of the customer; (b) whether the
sublicense was for trial or evaluation use or was a revenue-gathering
sublicense; and (c) the amount of the License and Maintenance Fees to
which Precedence is entitled by virtue of the granting of such sublicense.
6.3 AUDIT RIGHTS: Precedence shall have the right, on an annual basis, and at
a time convenient to IKOS but within ninety (90) days of request and
during IKOS' normal business hours to have an independent accountant
verify the records of IKOS regarding the sale or license of the Interface
to end-users. The accountant shall maintain the confidence of such
information except to provide Precedence with a confirmation of the
accuracy of IKOS' calculations, or a description of any deviations
<PAGE>
therefrom. Such audit shall be at Precedence's expense except that if more
than a five percent (5%) deficiency in Precedence's favor is discovered by
such audit, IKOS shall pay the reasonable cost of said audit.
7. PROPRIETARY RIGHTS.
7.1 OWNERSHIP OF INTERFACE: The Interface shall at all times remain the sole
property of Precedence, and IKOS shall have no right, title, or interest
therein. All copies of the Interface made by IKOS, in whatever form,
including compilations, translations, modifications, derivative works,
partial copies within modifications and improvements shall be the sole
property of Precedence. IKOS shall not disassemble, reverse-compile or
otherwise reverse-engineer the Interface. IKOS shall include Precedence's
copyright, patents and/or trade secret notices on any and all copies of
the Interface, in whole or in part, including partial copies or derivative
works. IKOS shall make reasonable commercial efforts, but no less effort
than that applied to other IKOS products, to preserve Precedence's
copyright, patent and trade secret rights under United States law and
international law. IKOS shall furnish to Precedence all copyright, patent
and/or trade secret notices for Precedence's prior approval, which
approval shall not be unreasonably withheld. If Precedence does not object
or accept the form of such notice within twenty (20) days, it shall be
deemed accepted.
7.2 OWNERSHIP OF IKOS INTEGRATION SOFTWARE: The IKOS Integration Software
shall at all times remain the sole property of IKOS, and Precedence shall
have no right, title, or interest therein.
7.3 INTERNATIONAL DISTRIBUTION OF INTERFACE: In cases where IKOS or its
distributors distributes the Interface outside the United States, IKOS
shall ensure that Precedence's proprietary rights are preserved
substantially as if the Interface was being distributed in the United
States and further that such distribution shall conform to the laws of the
foreign country in which the distribution is taking place.
8. UPDATES AND/OR ENHANCEMENTS.
8.1 FUTURE VERSIONS: Except as provided in Section 5.2 above, Precedence may,
at its sole election, agree to develop future enhancements which include
new functionality to the Interface as requested by IKOS. If Precedence
elects to develop such enhancements which include new functionality, they
shall be provided to IKOS pursuant to the terms and conditions of a
separate agreement to be negotiated between the parties.
9. TERM AND TERMINATION.
9.1 TERM: This Agreement shall have a term of one (1) year from the date first
written above and shall, unless terminated as provided below, be
automatically renewed for successive terms of one (1) year each.
9.2 TERMINATION FOR CAUSE: This Agreement may be terminated for cause at any
time upon written notice to the other party. For purpose of this paragraph
9.2, the term "cause" shall mean a breach of a material obligation by a
party which is not timely cured. Evidence of breach of a material
obligation, include, but are not limited to, the following events: (a) if
IKOS defaults in the payment of any amount when due under this Agreement;
(b) if either party files a petition or other document seeking relief
under United States bankruptcy law; or (c) if a receiver or other
custodian is appointed to care for the assets of a party.
<PAGE>
in the event a material obligation is breached, the breaching party shall
have thirty (30) days after receipt of notice of such breach from the non-
breaching party to cure the default (except upon IKOS' failure to pay
amounts due pursuant to this Agreement, in which latter case, IKOS shall
have ten (10) days to cure such default).
Upon termination of this Agreement by Precedence for cause, all
sublicenses granted by IKOS shall remain in full force and effect, and for
a period of two (2) years following termination, paragraph 2.7 shall
remain in full force and effect.
9.3 OBLIGATIONS UPON TERMINATION: Upon termination of this Agreement, the
parties agree that: (a) payment by IKOS for all sums owed to Precedence
as of the termination date shall be accelerated so as to be due
immediately; (b) except as provided in Section 9.4, IKOS shall cease the
manufacture, duplication and distribution of the Interface, in whole or in
part; and (c) IKOS shall promptly deliver a written statement signed by a
duly authorized officer of IKOS stating that it has complied with the
foregoing obligations.
9.4 RELEASE OF INTERFACE SOURCE CODE: Precedence shall deposit the source code
and all related documentation for the Interface, and any future updates to
the source code and related documentation for the Interface, when
available, into escrow with a reputable escrow firm selected by IKOS,
under terms consistent with this Agreement. If Precedence becomes
bankrupt, insolvent, or ceases to do business, the escrow firm shall
deliver all such deposited source code and documentation to IKOS. IKOS
shall then have access to source code together with the right to modify,
enhance, use and sublicense the Interface on the fee basis provided in
Exhibit D, which License grant shall survive termination of this
Agreement. Upon delivery, IKOS agrees to use such source code solely for
the continued development and support of this Interface to IKOS Products,
including modification of the source code solely for the purposes of
keeping the Interface compatible with the most recent version(s) of any of
the appropriate software programs and with any changes to the most recent
version(s) of SimMatrix. IKOS agrees to keep and maintain the Interface
source code in the strictest confidence, to treat the materials in a
manner similar to the way in which IKOS treats its own most sensitive
confidential information, and to take all reasonable measures to prevent
unauthorized use, copying, dissemination, or disclosure of the Interface
source code to third parties. IKOS shall pay the escrow firm's fees for
acting as escrow agent.
9.5 SURVIVAL: The provisions of paragraph 6.3 and Sections 7, 9, 10, 13 and 14
shall survive the termination of this Agreement.
10. CONFIDENTIAL INFORMATION.
10.1 DEFINITION: Each party acknowledges that during the term of this Agreement
it may be provided with certain confidential information belonging to the
other party. For purposes of this Agreement the term "Confidential
Information" shall include, but not be limited to, trade secrets, ideas,
processes, programs source code, formulas, materials, substances, sources
of supplies, technology, research, know-how, improvements, discoveries,
developments, designs, inventions, techniques, marketing plans,
strategies, forecasts, new products, unpublished financial statements,
budgets, projections, prices, costs, and customer lists.
10.2 EXCLUSION: Notwithstanding the provisions of paragraph 10.1, the term
"Confidential Information" as used herein shall not include any
information or material fact that is: (a) already in the possession of the
receiving party, its subsidiaries, employees or agents without prior
restrictions; (b) independently developed by the receiving party, its
subsidiaries, employees or agents without references to or use of the
Confidential
<PAGE>
Information; (c) publicly disclosed by the disclosing party or others; or
(d) made available by the disclosing party, its subsidiaries, employees or
agents to others without restriction.
10.3 OBLIGATIONS: The party receiving such Confidential Information agrees that
during the term of this Agreement and for three (3) years thereafter it
shall not (a) disclose the other party's Confidential Information except
to its subsidiaries, employees and agents who require access thereto to
perform their respective tasks and/or (b) use any such Confidential
Information except for the purposes expressly provided in this Agreement.
The standard of care to be utilized by the receiving party in its
obligations of non-disclosure and restricted dissemination shall be the
standard of care utilized by the receiving party in handling its own
information of like sensitivity which is not intended for public
disclosure or dissemination to third parties.
11. WARRANTY.
11.1 LIMITED WARRANTY: Precedence warrants that the Development Environment and
Interface shall support all the features, functions and specifications
contained in Exhibit A. Precedence's sole and exclusive liability and
IKOS' sole remedy for breach of this warranty shall be Precedence's prompt
correction and/or modification of the Development Environment and
Interface to cause the Interface to conform to the described features,
specifications and functions. This warranty does not cover any features,
specifications and functions. This warranty does not cover any copy of the
Development Environment, Interface or update which has been altered or
changed in any way by IKOS or any third party. Precedence is not
responsible for problems caused by changes in or modifications to the
operating characteristics of any computer hardware or operating system for
which the Interface or an update is procured, nor is Precedence
responsible for problems which occur as a result of the use of the
Interface in conjunction with software or with hardware which is
incompatible with the operating system for which the Interface is being
procured.
11.2 DISCLAIMER OF LIABILITY: THE FOREGOING REMEDIES CONSTITUTE IKOS' SOLE AND
EXCLUSIVE REMEDIES FOR BREACH OF WARRANTY ARISING OUT OF THIS AGREEMENT.
THESE WARRANTIES AND REMEDIES ARE FOR IKOS' EXCLUSIVE BENEFIT AND ARE NON-
TRANSFERABLE. THIS IS A LIMITED WARRANTY AND IS THE ONLY WARRANTY MADE BY
PRECEDENCE. PRECEDENCE EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES OF
ANY KIND EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY
AND/OR FITNESS FOR A PARTICULAR PURPOSE. PRECEDENCE DOES NOT WARRANT THAT
THE INTERFACE WILL BE ERROR-FREE OR OPERATE WITHOUT INTERRUPTION.
12. LIMITATION OF REMEDIES.
12.1 UNDER NO CIRCUMSTANCE SHALL EITHER PARTY BE LIABLE FOR ANY INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING, BUT NOT LIMITED
TO, LOST PROFITS OR LOSS OF BUSINESS, FOR BREACH OF WARRANTY, EVEN IF THE
PARTY HAS BEEN ADVISED ABOUT THE POSSIBILITY OF SUCH DAMAGE. IKOS
SPECIFICALLY AGREES THAT EXCEPT FOR BREACHES OF SECTIONS 10 OR 13 ANY
LIABILITY ON THE PART OF PRECEDENCE ARISING FROM BREACH OF WARRANTY,
BREACH OF CONTRACT, NEGLIGENCE, STRICT LIABILITY IN TORT, OR ANY OTHER
LEGAL THEORY SHALL NOT EXCEED ANY AMOUNTS PAID TO PRECEDENCE BY IKOS UNDER
THIS CONTRACT.
<PAGE>
13. INDEMNIFICATION.
13.1 INDEMNIFICATION BY IKOS: IKOS shall indemnify and hold harmless Precedence
(including, but not limited to, any damages suffered by Precedence such
as, court costs, attorneys' fees, and related expenses) from and against
any third party claims against Precedence that: (a) the Interface does not
meet warranties given by IKOS to the extent that such warranties are not
made in reliance upon written information provided by Precedence; or (b)
does not satisfy representations or warranties made by IKOS or any person
in IKOS' distribution chain to the extent that such representations or
warranties are not made in reliance upon written information provided by
Precedence; provided that Precedence provides prompt notice thereof and
full cooperation with the defense thereof at IKOS' expense and allows IKOS
full control of the defense and settlement thereof.
13.2 INDEMNIFICATION BY PRECEDENCE: Precedence shall not knowingly infringe any
copyright, patent, trade secret or other intellectual property right of
any third party. Precedence agrees to defend, indemnify and hold harmless
IKOS against any loss, cost, liability or expense arising out of or
resulting from any actions or claims brought against IKOS to the extent
such loss, cost, liability or expense is based upon a claim that the
Interface or any portion thereof directly infringes any copyright, patent,
trade secret or other intellectual property right of any third party
(collectively, "Third Party Rights"), and agrees to pay any settlements
entered into or damages awarded against IKOS to the extent based upon such
a claim; provided, that IKOS provides prompt notice thereof and full
cooperation in connection with the defense thereof at Precedence's
expense, and allows Precedence full control of the defense and settlement
thereof. If IKOS' purchase, use or sale of the Interface is enjoined,
Precedence shall, at Precedence's option: (a) procure at Precedence's
expense the right of IKOS to continue to purchase, use and/or sell the
Interface; or (b) provide to IKOS a full refund of fees already paid by
IKOS to Precedence for licenses which are canceled and refunded to the end
user. Notwithstanding the foregoing, Precedence shall have no liability
for any claim or infringement to the extent based on use or combination of
the Interface with other products not provided by Precedence if such claim
would have been avoided by use of the Interface alone, or to the extent
based solely on designs, processes, technology or other information or
materials provided by IKOS.
14. MISCELLANEOUS.
14.1 TAXES: IKOS shall be solely responsible for payment of all taxes or fees
(other than withholding taxes or taxes on the income of Precedence arising
out of this Agreement) imposed or levied on the transfer of any rights or
licenses granted hereunder.
14.2 NOTICES: All notices and demands of any kind which either party may be
required or desire to serve upon the other under the terms of this
Agreement shall be in writing and shall be sent by certified mail (return
receipt requested) or hand-delivered by courier to the receiving party at
the address of the receiving party set forth above. Each party may change
such address upon written notice to the other. All notices or demands
shall be deemed given on the day actually received by the party to whom
such notice is sent.
14.3 EXCUSABLE DELAYS AND FAILURES: Each party shall be excused for failure or
delay in performing its obligations under this Agreement to the extent
that such delay or failure results from any cause beyond the control of
such party, including, but not limited to, delays or failures caused by
the other party, acts of God, strikes or other labor
<PAGE>
disturbances, Government laws or regulations not existing at the time this
Agreement is executed, public disorder, and catastrophes of fire or
explosion.
14.4 ASSIGNMENT AND DELEGATION: This Agreement shall be binding upon and inure
to the benefit of the parties' respective successors and assigns. However,
neither party shall assign this Agreement or any rights or obligations
hereunder without the other party's prior written consent except to: (a) a
company, partnership, or other business entity wholly controlled or owned
by either party, (b) a purchaser of all or substantially all the assets of
either party or the business to which this Agreement relates or any person
or entity into which such party is merged or consolidated, or (c) a parent
company.
14.5 GOVERNING LAW: The law of the State of California, United States of
America, shall govern the interpretation of this Agreement and any
questions relating hereto.
14.6 ARBITRATION: Except for any breach of either party's obligations covering
Confidential Information, any claim or controversy arising out of or
related to this Agreement or any breach thereof, which claim or
controversy cannot be resolved informally, shall be finally settled in
Santa Clara County, California by arbitration before a single arbitrator
agreeable to both parties under the then current commercial rules of the
American Arbitration Association. If the parties cannot agree on an
arbitrator within sixty (60) days after a demand for arbitration has been
requested in writing by either of them, then arbitration shall proceed
before an arbitrator appointed by the American Arbitration Association
under its then current commercial rules. The arbitration award shall be
specifically enforceable, and judgment upon any award rendered pursuant to
the arbitration may be entered in any court with jurisdiction over the
parties and subject matter of the dispute. The arbitrator in such
arbitration shall have no right to award punitive or consequential
damages.
14.7 AMENDMENT: This Agreement may be amended or supplemented only by a writing
signed by both parties. No terms of any purchase order, invoice, or
similar document will amend or supplement this Agreement unless signed by
both parties.
14.8 WAIVER: A party's failure to enforce at any time any provision of this
Agreement, or any right in respect thereof, or to exercise any election
hereunder, shall not be considered to be a waiver of such provision,
right, or election or to affect the validity of this Agreement. No waiver
shall be effective unless given in a writing signed by the party making
such waiver. A waiver at one time shall not constitute a subsequent waiver
of the same condition, breach, default or occurrence at any other time
unless such waiver so explicitly provides.
14.9 SEVERABILITY AND ENTIRE AGREEMENT: If any provision, term, or condition of
this Agreement is in conflict with any applicable law or court judgment,
and a court of law shall declare that part of this Agreement is
unenforceable or invalid, then such part shall be enforced to the maximum
extent permitted by law, and the remainder of this Agreement shall remain
in full force and effect.
14.10 RELATIONSHIP OF THE PARTIES: Nothing contained in this Agreement shall be
construed to constitute either party as the partner, employee or agent of
the other, nor shall either party have any authority to bind the other in
any respect, it being intended that each shall remain responsible only for
its own actions.
14.11 EXPORT CONTROLS: IKOS shall comply with any and all export regulations and
rules now in effect or as may be issued from time to time by the Office of
Export Administration of the U.S. Department of Commerce or any other
Federal Governmental authority which has jurisdiction relating to the
export of the Interface. IKOS shall comply fully and
<PAGE>
strictly with the export controls of any other country in which it
lawfully does, or intends to do, business with the Interface under this
Agreement. In the event that IKOS chooses to export the Interface, it
shall be responsible at its sole cost for obtaining any and all necessary
export permits.
14.12 ENTIRE AGREEMENT: This Agreement, together with the contents of the
Exhibits listed immediately after the signature page hereof (which
Exhibits are incorporated by reference as though they are fully set forth
herein), is the parties' entire understanding as to the subject matter of
this Agreement, and it supersedes, merges, and renders void any and all
prior discussions, agreements and/or understandings (written and/or oral)
between them relating to the subject matter hereof.
IN WITNESS WHEREOF, THE PARTIES HAVE SET FORTH BELOW THEIR CONSENT TO THE TERMS
OF THE AGREEMENT THROUGH THE SIGNATURES OF THEIR DULY AUTHORIZED
REPRESENTATIVES.
PRECEDENCE INCORPORATED IKOS SYSTEMS INCORPORATED
By: /s/ Peter Odrina By: /s/ Larry Melling
----------------------------- -------------------------------
Name: Peter Odrina Name: Larry Melling
Title: President Title: VP Marketing
The Exhibits to this Agreement are:
Exhibit A -- Technical Specification
Exhibit B -- Schedule and Milestones
Exhibit C -- Interface End-User Agreement
Exhibit D -- Pricing and Fees
Exhibit E -- Marketing and Sales
<PAGE>
Exhibit A
Cadence Verilog/IKOS Interface
Technical Specification
PLATFORM/PRODUCT SUMMARY
--------------------------------------------------------------------------------
Cadence Verilog/IKOS Interface On SUN and HP
--------------------------------------------------------------------------------
1. Introduction
This document is a technical specification on the development of a co-
simulation interface between the Cadence Verilog-XL simulation environment
and the IKOS simulators. This specification is to be used as a general
overview for the interface. The incremental features of each phase of
development are as follows:
Netlist: Hierarchical Netlist Interface providing the designer with
the ability to translate a Verilog design into a IKOS design.
The entire structural portion of the design is scanned from
the Verilog design database and translated into hierarchical
IKOS format. Design partitioning would also be implemented to
allow a designer to select one or more sub-blocks at any
level of hierarchy in the design to be automatically
netlisted out to IKOS.
Co-simulation: IKOS Client Interface between the Precedence SimMatrix and
the IKOS interface software. Designs containing components in
both Verilog and IKOS can be simulated together under the
Verilog front-end. Event transfer, synchronization, probing
of internal IKOS signals, and interactive debugging would be
implemented as part of this phase.
1. Summary of Features
This interface between the Verilog design environment and IKOS is intended
to be used by designers that need to simulate one or more blocks or
components of a Verilog design in the IKOS simulator.
1.1 Major Features
The major functionality of the interface includes:
. Automatic hierarchical partitioning into the IKOS and Verilog components
using the Precedence hierarchical design partitioner.
. Mixed simulation using Verilog and IKOS simulators simultaneously. Verilog
components may be in HDL, gates, LMC, any other built-in simulation model,
or other simulators integrated into Verilog. The IKOS portion may be in
IKOS primitive components, such as gates, IKOS structural models, and/or
other models or components that can be simulated by IKOS.
. Direct coupled simulation on a single processor or remote network
simulation over a network using multiple processors.
. Verilog waveform package, gr_waves, used for displaying Verilog and IKOS
signals.
<PAGE>
. Automatic inclusion of external IKOS designs, blocks or libraries,
specified by the user during startup.
1.2 Design Flow
The steps a user would follow to initiate a co-simulation session would be:
1) Identify which portions of the design are to be simulated in each
simulator by attaching the SIMMATRIX=IKOS property to the cell in the
schematic editor or by specifying the partition in an initialization
file. Legal partitions will include one or more IKOS blocks in a Verilog
design; one or more Verilog blocks in a IKOS' partitioned block; or some
combination of the two, captured in the Verilog design environment.
2) Invoke Precedence SimMatrix (Verilog) specifying the Verilog design
files. This process does several actions:
a) The Precedence SimMatrix hierarchical partitioner will scan the
Verilog database to extract the IKOS and Verilog portions of the
design. During this phase, SimMatrix will also identify other
SimMatrix components targeted at other integrated simulators.
b) A hierarchical IKOS design is written to disk.
c) A new Verilog design with the IKOS portion of the design "cut-out" and
connected to "User blocks" for mixed simulation is written by
modifying the Verilog design file. The appropriate Verilog
communication blocks will be generated automatically.
d) The IKOS compilers are invoked on the IKOS generated netlists,
creating all of the machine specific files required for simulation.
4) Once the partitioning process is complete, the co-simulation session is
started. This process takes several steps:
a) Verilog is started on the new design. The SimMatrix communication
blocks inserted in the Verilog design causes the Precedence SimMatrix
to be initiated.
b) Configuration information is read from disk.
c) IKOS hardware is loaded with the IKOS design, either on the local
processor or on a remote machine. IKOS then parses the design and
locates and includes any necessary external blocks, as ASIC library
definitions.
d) Verilog begins simulating, passing vectors to the communication blocks
inserted by SimMatrix. These events are buffered and passed to IKOS
using high-performance subroutine communication.
e) Return events are passed back through Verilog communication blocks.
f) Synchronization would be based upon next event information, latency,
and may be additionally controlled by the user to increase parallelism
in a multi-processor environment.
5) Verilog's waveform display, gr_waves, is passed event data from Verilog
continuously for display.
2. IKOS Features Implemented for Verilog Users
IKOS portions of the design may be directly partitioned out from the Verilog
components and simulated in IKOS. For those Verilog designers that use IKOS
blocks as "black boxes", the
<PAGE>
Verilog front-end provides a unified environment for simulating and
debugging the design being simulated.
The major facilities included are:
. Automatic partitioning of IKOS portions of a design into hierarchical
IKOS structural descriptions. This partitioning is statically selected by
the designer using properties attached to objects.
. Transparent mixed mode initialization and communication.
. Mixed-simulation of Verilog and IKOS design blocks with event mapping
facilities.
. Direct high-performance coupling between the simulators.
. Probing of signals within the IKOS design blocks, either defined at the
beginning of the simulation session or incrementally added during the
simulation session.
. Ability to save and restore a co-simulation session.
3. Hierarchical Partitioning and Netlist Generation
From the Verilog simulation environment, the user would be able to generate
a full hierarchical IKOS netlist.
3.1. Architectural Design
Graphic showing how the IKOS structure is generated from Cadence Schematic
Editor through Verilog Design Database to Precedence SimMatrix Design
Partitioner. The graphic continues by showing how the foregoing generates
the Flow Structure or Verilog Netlist via the IKOS Netlister or the Verilog
Netlist Modification, both which are technology to be developed.
3.2. Discussion of Architecture
The netlist translation facility would be capable of translating the
structural portion of any Verilog design entered through the schematic
capture system or synthesized from an RTL description into the Verilog
database. The design objects that the designer is using are translated
verbatim into IKOS components, retaining identical cell name, parameter,
and pin name information and the original hierarchy is precisely preserved.
The netlist generator will be implemented by IKOS using utilities and
example Generic netlist writing code to be provided by Precedence.
<PAGE>
A design partitioner will be implemented allowing the designer to specify
one or more blocks to be simulated in IKOS. These blocks can be either at
the top level, or lower in the design hierarchy. The design database will
then be altered to indicate to Verilog that these blocks are external to
the Verilog simulation session.
4. IKOS Client Interface
For a full functionality Verilog to IKOS co-simulation environment, IKOS
is coupled to SimMatrix utilizing the Precedence Procedural Interface
(PPI).
4.1. Architectural Diagram
Graphic showing how the architecture of the IKOS/Precedence interface
leads to the standard products of the Verilog Control Window or the
Verilog Waveform Display.
4.2. Discussion of Architecture
4.2.1. Co-Simulation
Before or during simulation, the user can insert probe points within a
IKOS partition at any level within the design hierarchy. Waveforms can
then be displayed pertaining to the inserted probe points directly on the
Verilog gr_waves display.
This interface between the Verilog environment and the Precedence
SimMatrix connects several critical synchronization and control modules
together. The hierarchical netlist interface would be used to partition
the design into the Verilog and IKOS portions, generate the interface
components necessary on each side, and generate a hierarchical IKOS
netlist.
The event synchronization module would exchange state change events on
the boundary between the Verilog and SimMatrix (IKOS) portions of the
design. Events would be scheduled in SimMatrix for synchronization of the
simulators. Both unidirectional and bi-directional signal resolution
would be supported, using the full strength range of Verilog and IKOS
through a user programmable strength translation table.
Commands for controlling the simulation session would be provided through
the Verilog command interface. An interface between the Verilog command
interface and SimMatrix would be constructed, allowing the designer to
easily configure and control the interface.
<PAGE>
The Verilog gr_waves waveform package would be used to view Verilog and
IKOS traces simultaneously. Signals within IKOS may be viewed in the
Verilog graphical waveform only if the partitioned IKOS structure resides
within Verilog. If a signal within IKOS is specified, then the
appropriate calls will automatically be initiated.
4.2.2. Synchronization
A Precedence proprietary adaptive look-ahead synchronization method will
be used. This technology is part of the Precedence SimMatrix. In
addition, the designer is given the ability to adjust the synchronization
interval to a larger granularity to allow for even faster synchronization
performance.
4.2.3. Network Simulation
Network Simulation will allow the designer to interact with the Verilog
interface on one workstation while remote commands be sent over the
network to a second processor where a remote IKOS simulator is connected.
These actions are all transparent to the user. This would allow multiple
users to share a single IKOS on a central server.
The technology that enables the network simulation resides in the PPI
code provided by Precedence. The SimMatrix and half of the PPI run on the
local workstation along with Verilog. The other half of the PPI and the
IKOS simulator run on the remove workstation.
5. Documentation
Development of each phase of the interface shall include writing of an
Overview, User's Guide, and Quick Reference. One copy of this
documentation shall be provided by Precedence to IKOS for further
redistribution. Additional documentation such as a tutorial, design
guide, or training guide may be developed jointly by both Precedence and
IKOS.
Precedence will provide to IKOS a binary computer readable form of the
Interface documentation on either floppy or magnetic tape for further
formatting by IKOS. Precedence uses Microsoft Word for Windows 2.0 on
IBM-PC.
6. Verilog Version
This interface shall be developed and targeted to run using Verilog
software version 1.8 or later.
7. IKOS Version
This interface shall be developed and targeted to run using the current
production IKOS simulator and SimLink.
<PAGE>
Exhibit B
Verilog-XL/IKOS Co-simulation Interface
Schedule and Milestones
--------------------------------------------------------------------------------
Phase Task Start Complete IKOS Milestone Payments
Date Date Deliverable
--------------------------------------------------------------------------------
Phase IKOS investigation 6/15/94 9/7/94 Working Acceptance $10K to
1 and prototyping. prototype, start
performance
information.
--------------------------------------------------------------------------------
Phase Completing 9/7/94 the Beta ready Beta start $69,000
2 development, earlier code and to
documentation, of Beta documenta- start
QA and test. start or tion $69,000
10/3/94 at end
--------------------------------------------------------------------------------
Beta Beta test at 10/3/94 2 months Tested Production See
customer sites or after code release Exhibit
earlier start of D
Beta
--------------------------------------------------------------------------------
<PAGE>
Exhibit C
Verilog-XL/IKOS Co-simulation Interface
Interface End-User Agreement
IKOS SYSTEMS SOFTWARE LICENSE AGREEMENT
CUSTOMER: DATE:
--------------------------------------------- ---------------
ADDRESS:
---------------------------------------------
---------------------------------------------
---------------------------------------------
This agreement governs the site licensing and node licensing of IKOS Systems
Software to Customer and prevails over any additional, conflicting, or
inconsistent terms and conditions appearing on any purchase order submitted by
Customer. IKOS Systems, Inc. (IKOS) and Customer agree as follows:
1. SCOPE OF LICENSE GRANTED
1.1 Each license granted to Customer by IKOS shall be a nonexclusive,
nontransferable license to use IKOS software.
1.2 Each site and/or node license is granted for use at a single location.
The single location may include multiple buildings in the same postal
zone. The principal address of the Licensed Site is:
----------------------------------------------------
---------------------------------------------------- (fill in for site
AND node license)
----------------------------------------------------
STORAGE, INSTALLATION, OR OPERATION OF THE LICENSED SOFTWARE AT ANY
LOCATION DIFFERENT FROM THAT LISTED ABOVE IS STRICTLY PROHIBITED UNDER
THE SCOPE OF THIS SOFTWARE LICENSE AGREEMENT.
1.3 Each node license is granted for use on a single computer. The
manufacture, model, and serial number of the Licensed Computer is:
-----------------------------------
(fill in for node licenses only)
-----------------------------------
SOFTWARE LICENSE AGREEMENT REV/B PAGE
<PAGE>
1.4 Any license granted hereunder does not entitle the Customer to receipt or
use of the source code to any Licensed Software, or any title to the
Licensed Software.
2. PERMISSION TO COPY LICENSED SOFTWARE
2.1 The Customer may copy Licensed Software only as is reasonable necessary
to support the authorized use.
2.2 Site license customers are allowed to make copies as required to support
installation of hardware systems only at the Licensed Site specified in
Section 1.2.
2.3 Node license customers are prohibited from making any copies of Licensed
Software for use on any computer or workstation other than the Licensed
Computer specified in Section 1.3.
2.4 Customer shall reproduce and include in all copies of Licensed Software
all restrictive notices and legends included in Licensed Software as
received from IKOS and shall affix to the copy medium, and the container
housing the medium, all restrictive legends and legends affixed to the
medium or container as received from IKOS.
3. PROTECTION AND SECURITY OF LICENSED SOFTWARE
3.1 The Licensed Software constitutes confidential information of IKOS or its
licensors. Customer shall not make Licensed Software available in any
form to any person other than Customer's employees or contractors whose
job performance requires such access. Customer shall take reasonable and
appropriate action by instruction, agreement, or otherwise with its
employees and contractors to protect confidentiality of Licensed Software
and to ensure that any person permitted access to Licensed Software does
not provide it to others or duplicate it in contravention of this
agreement. Customer's action to protect the confidentiality of Licensed
Software shall be, at a minimum, the same actions it takes to protect its
own trade secrets.
3.2 The Customer shall not reverse-assemble, reverse-compile, or otherwise
reverse-engineer Licensed Software in whole or in part.
3.3 The provisions of the Section 3 shall survive the termination of this
agreement.
SOFTWARE LICENSE AGREEMENT REV/B PAGE
<PAGE>
4. SOFTWARE MAINTENANCE
Problem fixes and periodic updates to the Licensed Software are governed
by separate maintenance agreement. There is no commitment on the part of IKOS
to maintain the Licensed Software unless a maintenance agreement has been
executed.
5. LIMITED WARRANTY
5.1 IKOS warrants that Licensed Software will conform to published
specifications. This warranty is for a period of ninety (90) days from
delivery of the Licensed Software. For all defects reported to IKOS
within the warranty period, one copy of corrections of Licensed Software,
if any, and to respond to Customer's software problem reports according
to IKOS' standard assistance practices. IKOS' obligations under the
warranty for Licensed Software shall apply only to the latest IKOS
software release.
5.2 This warranty shall not be valid if the Licensed Software has been
altered in any way by the Customer.
5.3 Except as provided in this Section 5, IKOS makes no warranties, expressed
or implied, with respect to Licensed Software, including any warranty of
merchantability or fitness for a particular purpose.
6. PATENT AND COPYRIGHT INDEMNITY
6.1 IKOS shall defend or settle at its expense any action brought against
Customer alleging that any product furnished by IKOS under this agreement
infringes a United States patent or copyright, and IKOS will pay any
costs, damages, and attorney's fees finally awarded against Customer that
are attributable to such claim, provided that Customer (a) notifies IKOS
promptly in writing of this action, (b) provides IKOS all reasonable
information and assistance to defend the action, and (c) grants IKOS sole
authority and control of the defense or settlement of the action.
SOFTWARE LICENSE AGREEMENT REV/B PAGE
<PAGE>
6.2 If a final injunction is issued against Customer's use of Licensed
Software, IKOS will at its expense either (a) replace or modify the
Licensed Software so that it becomes non-infringing or (b) procure for
the Customer the right continue using the Licensed Software. If neither
of the foregoing alternatives is reasonable available, IKOS will accept
the return of the Licensed Software and refund to the Customer the
purchase price paid hereunder.
6.3 IKOS shall have no liability if the alleged infringement is based upon
(a) the modification of the Licensed Software other than by IKOS, (b) the
use of the Licensed Software as part of any infringing process, or (c)
the use of other than a current unaltered release of the Licensed
Software.
7. LIMITATION OF LIABILITY
IKOS' LIABILITY UNDER THIS AGREEMENT SHALL NOT EXCEED THE FEE PAID BY
CUSTOMER FOR THE LICENSED SOFTWARE. IN NO EVENT SHALL IKOS BE LIABLE FOR
CONSEQUENTIAL OR INCIDENTAL DAMAGES.
8. TERMINATION
8.1 Either party may terminate this agreement at any time upon written notice
if the other party fails to comply with any material term or condition.
The party not in compliance shall have thirty (30) days after notice to
cure any failure and avoid termination.
8.2 Upon termination of any license, Customer shall return to IKOS or destroy
all Licensed Software covered by such license, including any copies made
thereof, and shall furnish to IKOS a certificate of compliance with this
provision.
9. GENERAL PROVISION
9.1 This agreement shall be governed and construed in accordance with the
laws of the State of California, U.S.A.
9.2 The prevailing party in any legal action brought under this agreement
shall be entitled to reimbursement for its expenses, including court
costs and attorney's fees.
SOFTWARE LICENSE AGREEMENT REV/B PAGE
<PAGE>
9.3 If any provision of this agreement is held invalid, illegal, or
unenforceable, the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or impaired.
CUSTOMER: IKOS SYSTEMS, INC.
------------------------------------- ---------------------------------------
SIGNATURE SIGNATURE
------------------------------------- ---------------------------------------
NAME NAME
------------------------------------- ---------------------------------------
TITLE TITLE
------------------------------------- ---------------------------------------
DATE DATE
SOFTWARE LICENSE AGREEMENT REV/B PAGE
<PAGE>
Exhibit D
Verilog-XL/IKOS Co-simulation Interface
Pricing and Fees
1. Co-simulation Interface and Maintenance Fees
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Item Description Cumul- Recommended Extended Interface
ative List Price** License Fee
Quant. to
* Precedence
==========================================================================================
<C> <S> <C> <C> <C> <C>
1 SimMatrix for Verilog/IKOS 1-8 $20,000 OEM $17,250
Co-simulation interface Discount
based on SimMatrix
Backplane. 90 day
maintenance included. Per
copy. Floating license.
------------------------------------------------------------------------------------------
9-10 $20,000 OEM $12,500
Discount
------------------------------------------------------------------------------------------
40-80 $20,000 OEM $10,400
Discount
------------------------------------------------------------------------------------------
80-120 $20,000 OEM $7,800
Discount
------------------------------------------------------------------------------------------
120+ $20,000 OEM $5,300
Discount
------------------------------------------------------------------------------------------
2 Software maintenance with 1 $2,400/yr. Discount 12% of
phone software support, (12% of for logging interface
software patching, and new list) calls, License Fee
version upgrades included. providing per year: not
Per copy. updates to exceed
12% of
$12,500.
------------------------------------------------------------------------------------------
</TABLE>
* Quantities shown in this table are cumulative over the life of the contract.
** IKOS shall have the right to set, change or discount the list price of the
Interface sold by IKOS as necessary.
2. Training Fees
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Fee to Precedence Restrictions Location
<S> <C> <C> <C>
1 day class $500 per person minimum 4 people at IKOS HQ
(IKOS to provide Verilog
licenses for training)
1 day class $3,000 plus maximum 10 people at Customer
travel & expense site (Customer to provide
IKOS, workstations and
Verilog licenses for training)
----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 11.1
IKOS SYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(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
------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
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
======= ======= ====== ======== ========
Number of shares used in
computing per share
amounts:
Weighted average common
shares outstanding.... 5,379 5,415 5,455 5,445 5,541
Common equivalent
shares attributable to
stock options
(treasury stock
method)............... - - 196 214 484
------- ------- ------ -------- --------
Total weighted average
common shares
outstanding............. 5,379 5,415 5,651 5,659 6,025
======= ======= ====== ======== ========
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
======= ======= ====== ======== ========
</TABLE>
--------
*Fully diluted per share amounts within 3% of primary.
