<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996.
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
IKOS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 77-0100318
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
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.
KELLY L. CANADY, ESQ. WILLIAM A. HINES, ESQ.
GRAY CARY WARE & FREIDENRICH PILLSBURY MADISON & SUTRO LLP
A PROFESSIONAL CORPORATION P.O. BOX 7880
400 HAMILTON AVENUE, PALO ALTO, CA SAN FRANCISCO, CA 94120-7880
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 ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE 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, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR
INTEREST REINVESTMENT PLANS, 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.
[_]
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<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT AGGREGATE MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE FEE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($0.01 par
value)................ 1,290,390 shares $26.3125 $33,953,386 $11,708
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 168,312 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 May 20, 1996.
----------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 AN 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 24, 1996
PROSPECTUS
- ----------
1,122,078 Shares
[LOGO OF IKOS SYSTEMS(R)]
Common Stock
-------------
Of the 1,122,078 shares of Common Stock offered hereby, 1,000,000 shares are
being sold by IKOS Systems, Inc. ("IKOS" or the "Company") and 122,078 shares
are being sold by the Selling Stockholders. See "Selling Stockholders." The
Common Stock is quoted on the Nasdaq National Market under the symbol "IKOS."
On May 23, 1996, the last reported sale price for the Company's Common Stock
was $27.50 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
DISCOUNTS AND PROCEEDS TO
PRICE TO COMMISSIONS PROCEEDS TO SELLING
PUBLIC (1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
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Total (3)...................... $ $ $ $
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- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have 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
$350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 168,312 shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See
"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
, 1996.
-------------
Needham & Company, Inc.
SoundView Financial Group, Inc.
Unterberg Harris
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
----------------
AVAILABLE INFORMATION
IKOS has filed a Registration Statement on Form S-3 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with the Securities
and Exchange Commission (the "Commission"). This Prospectus does not contain
all of 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, copies of which may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the Commission.
The Company is also subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected and copied at the
Public Reference Room of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices at: Seven World Trade
Center, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
----------------
INFORMATION INCORPORATED BY REFERENCE
There are hereby incorporated by reference in this Prospectus the following
documents and information heretofore filed with the Commission: (1) the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1995; (2) the Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 30, 1995 and March 30, 1996; and (3) the Description of the
Company's capital stock as set forth under the caption "Description of Capital
Stock" in its Registration Statement on Form S-2 (File No. 33-63525),
effective October 12, 1995.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of securities contemplated hereby shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in a
document incorporated by reference or deemed to be incorporated by reference
in this Prospectus shall be deemed to be modified or superseded for all
purposes of this Prospectus and the Registration Statement to the extent that
a statement contained herein, therein or in any subsequently filed document
which also is incorporated or deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such 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 a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any and all of the documents referred to above which have
been or may be incorporated in this Prospectus by reference (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference therein). Requests for such copies should be directed to the
Company's principal executive offices located at 19050 Pruneridge Avenue,
Cupertino, CA 95014, Attention: Chief Financial Officer, telephone number
(408) 255-4567.
----------------
2
<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. Unless otherwise indicated, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
IKOS develops, manufactures, markets and supports hardware and software
systems for the verification of integrated circuit designs. The Company's
products are designed to enable its customers to verify complex IC designs more
rapidly and accurately than existing software-based simulation tools. The
Company sells its products to a broad range of customers in the communications,
multimedia/graphics, semiconductor, computer, aerospace and consumer
electronics industries, such as Lucent Technologies, Motorola, NEC, S3,
Scientific Atlanta, SGS-Thomson Microelectronics, Siemens and Texas
Instruments.
A semiconductor industry consortium estimates that IC complexity is growing
substantially faster than IC designer productivity, and IKOS believes that
insufficient verification capability is a significant contributor to this
productivity gap. Design verification is becoming increasingly complex and time
consuming as IC designs grow larger, geometries continue to shrink, and system
developers are forced to address speed, power, and other characteristics in
addition to functionality. The Company believes that these verification needs
increasingly cannot be satisfied by traditional methods, which consist
primarily of software simulators running on general purpose workstations.
IKOS' mission is to be the leading supplier of tools for the verification of
complex IC designs. To date, the Company has designed and marketed systems
which incorporate software and hardware based simulation algorithms. The
software components of IKOS' products consist of behavioral, gate and mixed-
level simulators, interfaces to other electronic design automation tools, cell
libraries and library development tools for modeling of ICs. IKOS' hardware
products include a family of special purpose, massively parallel computers
incorporating proprietary simulation algorithms. In support of its efforts to
broaden its spectrum of verification product offerings to include logic
emulation, the Company recently acquired Virtual Machine Works, Inc. (VMW),
which holds an exclusive license to emulation methods developed at
Massachusetts Institute of Technology.
IKOS markets its products and services primarily through its direct sales,
application engineering and service organization. IKOS' direct sales strategy
concentrates on those companies that IKOS believes are key users and designers
of large and high-performance ICs and IC-based systems. The Company assembles
and tests its products in its Cupertino, California facilities.
RECENT ACQUISITION
In May 1996, the Company acquired Virtual Machine Works, Inc. for
approximately $15 million in cash, stock and stock options. VMW was founded in
late 1993 to develop and market logic emulation systems for the verification of
complex ICs and IC-based systems.
IKOS believes that, despite the potential of emulation to shorten IC and
system development time, the high cost and difficulty of use of existing
emulation systems have impaired broad acceptance of emulation. VirtualWires, a
set of proprietary emulation methods under exclusive license from MIT, is being
developed to address certain input/output constraints and timing issues through
two processes referred to as interconnect resynthesis and timing resynthesis.
These processes are intended to allow the development of easier to use and less
costly emulation systems. IKOS plans to utilize these methods as it addresses
the market for logic emulation.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,000,000 shares
Common Stock offered by the Selling
Stockholders................................. 122,078 shares
Common Stock outstanding after the offering.. 8,551,019 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 YEARS ENDED SIX MONTHS ENDED
-------------------------- -----------------
OCT. 2, OCT. 1, SEPT. 30, APRIL 1, MAR. 30,
1993 1994 1995 1995 1996
------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues...................... $16,528 $21,636 $28,600 $12,788 $20,431
Gross profit...................... 10,197 15,706 21,461 9,481 15,898
Income (loss) from operations..... (8,875) 802 3,398 1,225 3,996
Net income (loss)................. (8,750) 1,505 3,156 1,163 3,785
Net income (loss) per share (2)... $ (1.62) $ 0.27 $ 0.51 $ 0.20 $ 0.49
Number of shares used in per share
computation (2).................. 5,415 5,651 6,151 5,897 7,681
</TABLE>
<TABLE>
<CAPTION>
MARCH 30, 1996
----------------------------
PRO FORMA
SEPT. 30, PRO AS
1995 ACTUAL FORMA(3) ADJUSTED(4)
--------- ------- -------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................... $ 7,509 $19,844 $10,603 $35,022
Total assets............................. 17,152 32,834 28,514 52,933
Long term debt, less current portion..... 1,300 800 800 800
Total stockholders' equity............... 7,710 22,590 17,990 42,409
</TABLE>
- -------
(1) Based on the number of shares outstanding at May 22, 1996 and assuming
issuance of 112,946 shares of Common Stock pursuant to the acquisition of
VMW by the Company (the "Acquisition"). Includes 25,997 shares of Common
Stock that will be issued upon the exercise of stock options by a Selling
Stockholder. Excludes (i) an aggregate of approximately 1,082,826 shares of
Common Stock subject to outstanding options under the Company's 1988 Stock
Option Plan, the Company's 1995 Stock Option Plan and the Company's 1995
Outside Directors Stock Option Plan (collectively, the "Option Plans"),
(ii) approximately 70,850 shares of Common Stock subject to certain other
outstanding options, (iii) approximately 589,156 shares available for
future issuance pursuant to the Company's Option Plans and
(iv) approximately 58,003 shares of Common Stock subject to certain
outstanding options assumed pursuant to the Acquisition. See "Selling
Stockholders" and Notes 4 and 8 of Notes to Consolidated Financial
Statements of IKOS.
(2) For a description of the net income (loss) per share, see Note 1 of Notes
to Consolidated Financial Statements of IKOS.
(3) Reflects on a pro forma basis the effect of the Acquisition as if the
Acquisition had occurred on March 30, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and
Unaudited Pro Forma Condensed Combined Financial Statements.
(4) Adjusted to reflect the sale of the 1,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of
$26.3125 per share and the exercise of options to purchase 25,997 shares to
be sold by a Selling Stockholder and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
IKOS, the Company's facing parrots logo and Voyager are registered trademarks
of the Company. Gemini and VirtualWires are trademarks of the Company. This
Prospectus also includes trade names and trademarks of companies other than
IKOS.
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. Unless the context otherwise requires,
references in this Prospectus to the "Company" and "IKOS" refer to IKOS
Systems, Inc. and its consolidated subsidiaries.
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. This Prospectus contains forward-looking
statements, and actual results could differ materially from those projected in
the forward-looking statements as a result of numerous factors, including the
factors set forth below and elsewhere in 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, 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. 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, until recently,
a significant portion of the Company's revenue had resulted and may in the
future result from shipments during the last few weeks of the quarter from
orders generally received in the last month of the quarter. Any concentration
of sales at the end of the quarter may 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."
CONTINUED ACCEPTANCE OF THE COMPANY'S SIMULATION PRODUCTS
Substantially all of the Company's product revenues since fiscal 1993 have
been derived from the sale of its Voyager and Gemini simulation systems. There
can be no assurance that market acceptance of these products will continue.
The continued adoption of the Company's hardware-assisted simulation products
for the verification of integrated circuit ("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, continued industry acceptance
of mixed-level hardware-assisted simulation, 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. 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."
DEVELOPMENT AND ACCEPTANCE OF COMPANY'S EMULATION PRODUCTS
Prior to the Acquisition, the Company had limited in-house experience with
logic emulation, and the Company's initial emulation technology is currently
under development. There can be no assurance that
5
<PAGE>
development of this technology will be completed, or that any products
resulting from such development will adequately meet the requirements of the
marketplace, be of acceptable quality or achieve market acceptance. In
addition, because the Company's proposed emulation products are based on a new
technology concept, there can be no assurance that the products, when
developed, will function and perform as planned or that the Company will not
experience other delays or difficulties in the development of these products.
The success of the Company in developing, introducing, selling and supporting
emulation products will depend on a variety of factors in addition to the
timely and successful completion of product design and development, including
timely and efficient implementation of manufacturing processes, effective
sales, marketing and customer service, and the absence of performance problems
or other difficulties that may require design modifications and related
expenses and may hinder or damage market acceptance of the products. While the
Company's emulation systems are being designed to provide cost and ease of use
advantages intended to broaden the market for logic emulation, there can be no
assurance that its products, if successfully developed, will be able to
achieve such goals. Moreover, there can be no assurance that the market for
logic emulation will broaden beyond the current set of emulation systems
users. The adoption of any emulation products the Company may develop will
also depend on the continued increasing complexity of ICs designed for
electronic systems, integration of such products with other tools for IC
design and verification, importance of the time to market benefits of
emulations systems and industry acceptance of the need to close the gap
between high level design and silicon production. Because the market for
emulation products is new and evolving, it is difficult to predict with any
assurance whether the market for emulation products will continue to expand.
See "Business--Industry Background" and "--Emulation."
RISKS RELATING TO THE ACQUISITION OF VMW
Achieving the anticipated benefits of the Acquisition will depend in part
upon the Company's ability to achieve integration of the two companies'
businesses and operations in an efficient and effective manner, and there can
be no assurance that such integration will occur smoothly or successfully. The
successful combination of companies in the high technology industry may be
more difficult to accomplish than in other industries. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated organizations. The integration of certain operations
following the Acquisition will require the dedication of management resources
which may temporarily distract attention from the day-to-day business of the
combined company. The inability of management to successfully integrate the
operations of the two companies or to retain key personnel could have a
material adverse effect on the business and results of operations of IKOS.
IKOS expects to incur a charge to operations currently estimated to be
approximately $9.6 million in the quarter ending June 29, 1996, to reflect the
purchase of in-process research and development pursuant to the Acquisition.
In addition, the Company intends to amortize approximately $5.7 million of
costs relating to the Acquisition. The amortization period for such costs will
be over their useful lives, which are estimated to be three to five years.
These amounts are preliminary estimates and therefore subject to change.
Additional unanticipated expenses may be incurred relating to the integration
of the businesses of VMW and IKOS, including the integration of technologies
and research and development and administrative functions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The electronic design automation ("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 simulation and emulation products. To date,
substantially all of the Company's revenue has resulted from sales of
hardware-assisted simulation products. The Company currently experiences
competition from hardware-assisted simulation-based systems sold by Zycad
Corporation ("Zycad") and traditional software verification methodologies. To
the extent the Company competes in the market for emulation products in the
future, it will experience competition from emulation systems sold by
Quickturn Design Systems, Inc. ("Quickturn") and other EDA companies. The
Company expects competition in the market for verification tools to increase
as other companies attempt to introduce new products, such as
6
<PAGE>
cycle-based software simulation 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 simulation systems and to design, develop and support its future
simulation and emulation products 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 simulation 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 operations. 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--
Simulation" and "--Emulation."
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 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."
7
<PAGE>
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 application-specific integrated circuits
("ASICs") that are currently manufactured solely by American Microsystems,
Inc. ("AMI") and subassemblies that are manufactured solely 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 six months ended
March 30, 1996 and in fiscal 1995, sales to the Company's top ten customers
accounted for approximately 62.0% and 49.5%, respectively, of the Company's
net revenues. 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 industries, 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. As a result,
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.
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, has licensed rights under certain patent applications relating
to VirtualWires and has filed additional patent applications. However, there
can be no assurance that any patent owned or licensed by the Company will not
be invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the
Company's patent applications, whether
8
<PAGE>
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 $1.25 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 and diversion of management efforts 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 relies on certain software and other technologies 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 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 licenses could
result in delays or reductions in product shipments until equivalent software
or technology could be identified, licensed and integrated, which would
adversely affect the Company's operating results. In particular, the Company
licenses certain VirtualWires emulation patent rights from Massachusetts
Institute of Technology ("MIT"). This license is exclusive for a period ending
on the earlier of the expiration of eight years after the first commercial
sale or use of a licensed patent or process or December 22, 2004, and
thereafter becomes nonexclusive. MIT may terminate this license if the Company
fails to meet certain minimum net sales milestones or upon certain other
material breaches of the license agreement that remain uncured after 90 days'
notice of such breach. Loss of this license could materially adversely affect
the Company's future operating results. See "Business--Proprietary Rights."
INTERNATIONAL SALES
International sales accounted for approximately 31.1% and 30.9% of the
Company's net revenues for the six month periods ended March 30, 1996 and
April 1, 1995, respectively, and 36.9%, 25.8% and 20.1% of the Company's net
revenues in fiscal 1995, 1994 and 1993, 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. Revenues derived from international sales 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 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
9
<PAGE>
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 AND MANAGEMENT OF GROWTH
The Company's future performance depends in significant part upon attracting
and retaining key technical, sales and marketing 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,
Delaware law and 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.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$24,397,000 ($28,562,000 if the Underwriters' over-allotment option is
exercised in full), assuming a public offering price of $26.3125 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses. The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders.
The Company expects to use the net proceeds from this offering for general
corporate purposes, including capital expenditures and working capital. A
portion of the proceeds may also be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary
technologies. However, the Company has no present understandings, commitments,
agreements or intentions with respect to any material acquisitions of other
businesses, products or technologies. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment grade obligations.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently traded on the Nasdaq National Market
under the symbol IKOS. From March 1994 to May 1995, the Company's stock was
traded on The Nasdaq SmallCap Market. The following table sets forth, for the
fiscal period indicated, the high and low closing sales prices for the Common
Stock as reported by Nasdaq. The quotations for the Common Stock traded on The
Nasdaq SmallCap Market may reflect inter-dealer prices, without retail mark-
up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
FISCAL 1994
First Quarter............................................... $ 5.125 $ 2.875
Second Quarter.............................................. 5.000 3.125
Third Quarter............................................... 3.750 2.625
Fourth Quarter.............................................. 4.250 2.625
FISCAL 1995
First Quarter............................................... 5.125 3.250
Second Quarter.............................................. 6.500 4.500
Third Quarter............................................... 10.125 4.750
Fourth Quarter.............................................. 13.625 8.875
FISCAL 1996
First Quarter............................................... 14.125 9.500
Second Quarter.............................................. 19.250 8.625
Third Quarter (through May 23, 1996)........................ 27.500 17.188
</TABLE>
On May 23, 1996, the last reported sale price for the Common Stock, as
reported on the Nasdaq National Market, was $27.50 per share. The approximate
number of record holders of IKOS stock as of April 30, 1996 was 172. The
approximate number of beneficial holders is estimated to be 3,850 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.
11
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 30, 1996, on a pro forma basis to give effect to the
Acquisition, and pro forma as adjusted to give effect to the Acquisition and
the issuance and sale of the 1,000,000 shares of Common Stock offered by the
Company hereby at an assumed public offering price of $26.3125 per share and
the exercise of options to purchase 25,997 shares to be sold by a Selling
Stockholder 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 and Unaudited
Pro Forma Condensed Combined Financial Statements contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 30, 1996
----------------------------
(IN THOUSANDS)
PRO
PRO FORMA AS
ACTUAL FORMA(1) ADJUSTED
-------- -------- --------
<S> <C> <C> <C>
Long-term debt, less current portion (2)......... $ 800 $ 800 $ 800
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000
shares authorized; no shares issued and
outstanding actual, pro forma or pro forma as
adjusted...................................... -- -- --
Common stock, $0.01 par value; 25,000,000
shares authorized; 7,264,277 shares issued and
outstanding actual; 7,377,223 shares issued
and outstanding pro forma; 8,403,220 shares
issued and outstanding pro forma as adjusted
(3)........................................... 73 74 84
Additional paid-in capital..................... 38,115 43,114 67,523
Accumulated deficit............................ (15,598) (25,198) (25,198)
-------- -------- --------
Total stockholders' equity................... 22,590 17,990 42,409
-------- -------- --------
Total capitalization....................... $ 23,390 $ 18,790 $ 43,209
======== ======== ========
</TABLE>
- --------
(1) Reflects on a pro forma basis the effect of the Acquisition as if the
Acquisition had occurred on March 30, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
Unaudited Pro Forma Condensed Combined Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements of IKOS.
(3) Excludes at March 30, 1996 (i) an aggregate of approximately 1,206,250
shares of Common Stock subject to outstanding options under the Company's
Option Plans, (ii) approximately 71,750 shares of Common Stock subject to
certain other outstanding options, (iii) approximately 612,631 shares
available for future issuance pursuant to the Company's Option Plans and
(iv) approximately 58,003 shares of Common Stock subject to certain
outstanding options assumed pursuant to the Acquisition. See "Selling
Stockholders" and Notes 4 and 8 of Notes to Consolidated Financial
Statements of IKOS.
12
<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 September 30, 1995 and with respect to the Company's
consolidated balance sheets at October 1, 1994 and September 30, 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
28, 1991 and September 26, 1992 and the selected consolidated balance sheet
data at September 28, 1991, September 26, 1992 and October 2, 1993 are derived
from the Company's audited consolidated financial statements but not included
herein. The selected consolidated financial data at March 30, 1996 and for the
six months ended April 1, 1995 and March 30, 1996 are derived from unaudited
financial statements of the Company, which are included herein. 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 six months
ended March 30, 1996 are not necessarily indicative of results to be expected
for any future period. The data should be read in conjunction with the
consolidated financial statements included herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
----------------------------------------------- ------------------
SEPT. 28, SEPT. 26, OCT. 2, OCT. 1, SEPT. 30, APRIL 1, MAR. 30,
1991 1992 1993 1994 1995 1995 1996
--------- --------- ------- ------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues............ $15,122 $13,942 $16,528 $21,636 $28,600 $12,788 $20,431
Cost of revenues........ 3,786 3,993 6,331 5,930 7,139 3,307 4,533
------- ------- ------- ------- ------- ------- -------
Gross profit........... 11,336 9,949 10,197 15,706 21,461 9,481 15,898
Operating expenses:
Research and
development........... 5,751 2,627 7,896 3,861 3,999 1,954 3,268
Sales and marketing.... 8,920 8,879 9,303 9,447 11,763 5,268 6,911
General and
administrative........ 1,570 1,807 1,873 1,596 2,301 1,034 1,723
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 16,241 13,313 19,072 14,904 18,063 8,256 11,902
Income (loss) from
operations............. (4,905) (3,364) (8,875) 802 3,398 1,225 3,996
Other income (expense):
Interest income........ 784 329 130 69 159 49 482
Interest expense....... -- -- -- (75) (107) (63) (42)
Other.................. -- -- 48 140 117 58 59
------- ------- ------- ------- ------- ------- -------
Total other income... 784 329 178 134 169 44 499
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes and extraordinary
credit................. (4,121) (3,035) (8,697) 936 3,567 1,269 4,495
Provision for income
taxes.................. 58 72 53 95 411 106 710
------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary credit... (4,179) (3,107) (8,750) 841 3,156 1,163 3,785
Extraordinary credit--
forgiveness of debt.... -- -- -- 664 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $(4,179) $(3,107) $(8,750) $ 1,505 $ 3,156 $ 1,163 $ 3,785
======= ======= ======= ======= ======= ======= =======
Per share:
Income (loss) before
extraordinary credit.. $ (0.79) $ (0.58) $ (1.62) $ 0.15 $ 0.51 $ 0.20 $ 0.49
Extraordinary credit... -- -- -- 0.12 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $ (0.79) $ (0.58) $ (1.62) $ 0.27 $ 0.51 $ 0.20 $ 0.49
======= ======= ======= ======= ======= ======= =======
Common and common
equivalent shares used
in computing per share
amounts................ 5,273 5,379 5,415 5,651 6,151 5,897 7,681
======= ======= ======= ======= ======= ======= =======
CONSOLIDATED BALANCE
SHEET DATA:
Working capital......... $10,397 $ 6,830 $ 1,805 $ 3,850 $ 7,509 $19,844
Total assets............ 17,732 15,678 10,806 12,129 17,152 32,834
Long-term debt, less
current portion........ 504 344 2,779 2,151 1,300 800
Total stockholders'
equity................. 13,645 10,603 1,903 3,476 7,710 22,590
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's revenues and results of operations are difficult to forecast
and could differ materially from those projected in the forward-looking
statements contained in this Prospectus as a result of a number of factors,
including without limitation, those discussed under "Risk Factors" above.
OVERVIEW
The Company develops, manufactures, markets and supports high-performance
hardware and software systems for verification of ICs and IC-based electronic
systems.
In May 1996, the Company acquired VMW, a development stage company founded
by certain individuals affiliated with MIT. VMW was founded in late 1993 to
develop and market logic emulation systems for system level verification of
designs of complex ICs and electronic systems. Pursuant to the Acquisition,
holders of VMW stock received an aggregate of approximately $10.0 million in
cash and 112,946 shares of IKOS Common Stock. In addition, all outstanding
options to acquire VMW Common Stock were converted into options to acquire an
aggregate of 84,000 shares of IKOS Common Stock. The Acquisition constituted a
taxable reorganization and was accounted for as a purchase. The Company
expects to take a one-time charge of approximately $9.6 million in the fiscal
quarter ending June 29, 1996 relating to the purchase of in-process research
and development of VMW. See Note 8 of Notes to Consolidated Financial
Statements of IKOS and Unaudited Pro Forma Condensed Combined Financial
Statements.
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.
14
<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 SIX MONTHS ENDED
-------------------------- -----------------
OCT. 2, OCT. 1, SEPT. 30, APRIL 1, MAR. 30,
1993 1994 1995 1995 1996
------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 38.3 27.4 25.0 25.9 22.2
----- ----- ----- ----- -----
Gross profit...................... 61.7 72.6 75.0 74.1 77.8
Operating expenses:
Research and development........ 47.8 17.8 14.0 15.3 16.0
Sales and marketing............. 56.3 43.7 41.1 41.2 33.8
General and administrative...... 11.3 7.4 8.0 8.1 8.4
----- ----- ----- ----- -----
Total operating expenses...... 115.4 68.9 63.1 64.6 58.2
----- ----- ----- ----- -----
Income (loss) from operations..... (53.7) 3.7 11.9 9.6 19.6
Other income (expense):
Interest income................. 0.8 0.3 0.6 0.3 2.4
Interest expense................ -- (0.3) (0.4) (0.5) (0.2)
Other........................... 0.3 0.6 0.4 0.5 0.3
----- ----- ----- ----- -----
Total other income............ 1.1 0.6 0.6 0.3 2.5
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes and extraordinary
credit........................... (52.6) 4.3 12.5 9.9 22.0
Provision for income taxes........ 0.3 0.4 1.4 0.8 3.5
----- ----- ----- ----- -----
Income (loss) before extraordinary
credit........................... (52.9) 3.9 11.1 9.1 18.5
Extraordinary credit--forgiveness
of debt.......................... -- 3.1 -- -- --
----- ----- ----- ----- -----
Net income (loss)............... (52.9)% 7.0% 11.1% 9.1% 18.5%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 30, 1996 AND APRIL 1, 1995
Net revenues. Net revenues increased 59.8% to $20.4 million in the six
months ended March 30, 1996 as compared to $12.8 million for the comparable
period of fiscal 1995. International revenues increased by 61.2% and domestic
revenues increased by 59.1% over this same period. The primary reason for the
increase was continued growth of unit sales of the Voyager and Gemini systems,
the latter of which was introduced in the second half of fiscal 1995.
Maintenance revenue was $3.5 million and $2.3 million for the first six months
of fiscal 1996 and 1995, respectively, which represents 16.9% and 17.6% of net
revenues. International sales (export sales and sales shipped by the Company's
European operation) were $6.4 million and $3.9 million for the first six
months of fiscal 1996 and 1995, respectively, which represents 31.1% and 30.9%
of net revenues.
Gross profit. Gross profit was $15.9 million and $9.5 million or 77.8% and
74.1% of total net revenue for the first six months of fiscal 1996 and 1995,
respectively. The increase in gross margin was primarily the result of
increased maintenance revenues without any significant increases in
maintenance costs as well as the positive margin impact from product revenue
mix generated in the second quarter.
Research and development. Research and development expenses were $3.3
million and $2.0 million for the first six months of fiscal 1996 and 1995,
respectively. As a percentage of net revenues, research and development
expenses increased to 16.0% for the first six months of fiscal 1996 as
compared to 15.3% for the first six months of fiscal 1995. Research and
development costs increased significantly during the six month period ended
March 30, 1996 as a result of increased personnel expenses and the expense of
approximately $250,000 in the first quarter of 1996 relating to certain
acquired technology that had not yet reached technological feasibility and did
not have alternative future uses. The Company expects research and
15
<PAGE>
development expenses to increase in absolute dollars over the remainder of the
year as the Company continues its product enhancement, new product development
and technology development programs. The Company also expects that it will
take a charge of approximately $9.6 million in the fiscal quarter ending June
29, 1996 relating to the purchase of in-process research and development of
VMW. The purchase price was allocated to the tangible and intangible assets of
VMW based on the fair market values of those assets using a risk adjusted
discounted cash flows approach. The evaluation of the underlying technology
and patent rights acquired considered the inherent difficulties and
uncertainties in completing the development, and thereby achieving
technological feasibility, and the risks related to the viability of and
potential changes in future target markets. The underlying technology and
patent rights had no alternative use (in other research and development
projects or otherwise) since the technology was acquired for the sole purpose
of developing emulation products.
Sales and marketing. Sales and marketing expenses were $6.9 million and $5.3
million for the first six months of fiscal 1996 and 1995, respectively. As a
percentage of net revenues, sales and marketing expenses decreased to 33.8%
for the first six months of fiscal 1996 as compared to 41.2% for the first six
months of fiscal 1995. The increase in absolute dollars was primarily the
result of increased headcount, increased commissions as a result of higher
revenue levels and increased expenses for international operations. Sales and
marketing expenses are expected to continue to increase in absolute dollars
over the next two fiscal quarters reflecting increased headcount, commission
expense and marketing expenses.
General and administrative. General and administrative expenses were $1.7
million and $1.0 million for the first six months of fiscal 1996 and 1995,
respectively. As a percentage of net revenues, general and administrative
expenses increased to 8.4% for the first six months of fiscal 1996 as compared
to 8.1% for the first six months of fiscal 1995. This increase was primarily
due to additional headcount, increased investor relations expenses,
professional services and profit sharing expenses. General and administrative
expenses are expected to increase slightly in absolute dollars over the
remainder of fiscal 1996.
Provision for income taxes. The provision for income taxes consists
primarily of federal alternative minimum tax, state and foreign taxes and
Japanese withholding taxes. The tax rate is substantially below the federal
statutory rate due to the utilization of net operating loss carryovers for
which no benefit has previously been taken.
FISCAL 1995, 1994 AND 1993
Net revenues. Net revenues for fiscal 1995 were $28.6 million as compared to
$21.6 million for fiscal 1994. The primary reason for this 32.2% increase was
continued growth in sales of Voyager systems and the introduction of Gemini
systems in the fourth quarter of fiscal 1995. These product lines contributed
to the majority of net product revenues for the year. Maintenance revenue was
$4.9 million and $3.8 million for fiscal 1995 and 1994, respectively,
representing 17.1% and 17.3% of net revenues. The increase in maintenance
revenue was a result of the continued acceptance of the new products by the
growing customer base. International sales increased by 89.1% and domestic
revenues increased by 12.4% over this same period. 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 sales (export sales and sales shipped by the Company's
European operation) were $10.6 million, $5.6 million and $3.3 million for
fiscal 1995, 1994 and 1993, respectively. These sales represented 36.9%, 25.8%
and 20.1% of net revenues. The increases in international sales were a result
of the increased customer acceptance of the new product offerings, improved
economic conditions, particularly in Europe, increased focus on the
international market and increased presence in the Far East marketplace as the
Company opened its subsidiary in Japan during fiscal 1995.
Gross profit. Gross profit was $21.5 million, $15.7 million and $10.2
million or 75.0%, 72.6% and 61.7% of net revenues for fiscal 1995, 1994 and
1993, respectively. The increases in gross margin were primarily the result of
a change in product mix to a greater percentage of higher margin newer product
offerings. The Voyager products and the Gemini products have a higher software
content than previously offered products, which contributed to the higher
margins. To a lesser extent, the absorption of fixed manufacturing costs over
a broader revenue base also contributed to higher overall margins.
16
<PAGE>
Research and development. Research and development expenses were $4.0
million, $3.9 million and $7.9 million for fiscal 1995, 1994 and 1993,
respectively. As a percentage of net revenues, research and development
expenses were 14.0%, 17.8% and 47.8% for fiscal 1995, 1994 and 1993,
respectively, as the Company had completed a build-up in staffing and expenses
to effect its major product development program that began in fiscal 1991.
Research and development expenses in fiscal 1993 were substantially higher
than either fiscal 1994 or 1995 because of a $3.6 million charge in fiscal
1993 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.
Sales and marketing. Sales and marketing expenses were $11.8 million, $9.4
million and $9.3 million in fiscal 1995, 1994 and 1993 or 41.1%, 43.7% and
56.3% of net revenues, respectively. The primary cause of the increase in
absolute dollars has been an increase in the amount of presale support and
benchmarking performed by field application engineers and increased commission
expenses. Spending has also increased in the foreign sales offices to support
the increased sales and marketing activity in both Europe and Asia.
General and administrative. General and administrative expenses were $2.3
million, $1.6 million and $1.9 million for fiscal 1995, 1994 and 1993, or
8.0%, 7.4% and 11.3% of net revenues, respectively. The increase in fiscal
1995 was primarily due to additional headcount, as the Company filled the
President and Chief Operating Officer positions that were vacant throughout
fiscal 1994.
Other income (expense). Net interest income in fiscal 1995 of $52,000 was
the result of interest income of $159,000 being earned on an increasing cash,
cash equivalents and short-term investments during the year, net of interest
paid on long-term debt borrowings of $107,000. Net interest expense in fiscal
1994 was the result of $75,000 of interest expense on the long-term debt. Net
interest income of $130,000 for fiscal 1993 represents interest income earned
on cash, cash equivalents and short-term investments with no related interest
expense. Other income in fiscal 1995, 1994 and 1993 was $117,000, $140,000 and
$48,000, respectively, and primarily relates to rental income from property
that the Company began leasing in 1993.
Provision for income taxes. The Company's tax provision for fiscal 1995,
1994 and 1993 consists primarily of federal alternative minimum tax, state
taxes and foreign withholding taxes. As of September 30, 1995, the Company had
federal and state net operating loss carryforwards of approximately $10.0
million and $400,000, respectively. The Company also had federal and
California research and development tax credit carryforwards of approximately
$1.0 million and $300,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 1997 through 2009, if
not utilized.
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.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company has provided a full valuation
allowance against its net deferred tax assets due to uncertainties surrounding
their realization, primarily due to the Company having cumulative losses in
the last three years, which causes predictability of earnings in the early
future years to be uncertain.
Extraordinary credit--forgiveness of debt. In April 1994, the Company and
Racal re-negotiated the terms of the July 1, 1993 agreement regarding the
transfer, joint development and joint ownership in certain Racal technology.
The new terms reduce overall payments to Racal from IKOS by $750,000 and
extend the scheduled payments into fiscal 1998. This resulted in an
extraordinary credit of $664,000 after being offset by certain related
expenses. See Note 2 of Notes to Consolidated Financial Statements of IKOS.
17
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain quarterly financial information for
fiscal 1995 and the first two quarters of fiscal 1996. 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 1995 FISCAL 1996
------------------------------------ ------------------
QUARTERS ENDED
-------------------------------------------------------
DEC. 31, APR. 1, JULY 1, SEPT. 30, DEC. 30, MARCH 30,
1994 1995 1995 1995 1995 1996
-------- ------- ------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............. $6,108 $6,680 $7,395 $8,417 $9,277 $11,154
Cost of revenues......... 1,644 1,663 1,826 2,006 2,136 2,397
------ ------ ------ ------ ------ -------
Gross profit........... 4,464 5,017 5,569 6,411 7,141 8,757
Operating expenses:
Research and
development........... 919 1,035 1,012 1,033 1,541 1,727
Sales and marketing.... 2,582 2,686 3,085 3,410 3,494 3,417
General and
administrative........ 483 551 542 725 689 1,034
------ ------ ------ ------ ------ -------
Total operating
expenses............ 3,984 4,272 4,639 5,168 5,724 6,178
------ ------ ------ ------ ------ -------
Income from operations... 480 745 930 1,243 1,417 2,579
Other income (expense):
Interest income........ 23 26 42 68 197 285
Interest expense....... (38) (25) (23) (21) (18) (24)
Other.................. 29 29 29 30 29 30
------ ------ ------ ------ ------ -------
Total other income... 14 30 48 77 208 291
------ ------ ------ ------ ------ -------
Income before provision
for income taxes........ 494 775 978 1,320 1,625 2,870
Provision for income
taxes................... 46 60 90 215 250 460
------ ------ ------ ------ ------ -------
Net income............. $ 448 $ 715 $ 888 $1,105 $1,375 $ 2,410
====== ====== ====== ====== ====== =======
Earnings per share:...... $ 0.08 $ 0.12 $ 0.14 $ 0.17 $ 0.18 $ 0.31
====== ====== ====== ====== ====== =======
Common and common
equivalent shares used
in computing per share
amounts................. 5,783 6,011 6,281 6,531 7,519 7,843
====== ====== ====== ====== ====== =======
</TABLE>
18
<PAGE>
The following table presents certain operating statement items expressed as
a percentage of net revenues for each quarter of fiscal 1995 and for the first
two quarters of fiscal 1996.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
---------------------------------- ------------------
QUARTERS ENDED
-----------------------------------------------------
DEC. 31, APR. 1, JULY 1, SEPT. 30, DEC. 30, MARCH 30,
1994 1995 1995 1995 1995 1996
-------- ------- ------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......... 26.9 24.9 24.7 23.8 23.0 21.5
----- ----- ----- ----- ----- -----
Gross profit........... 73.1 75.1 75.3 76.2 77.0 78.5
Operating expenses:
Research and
development........... 15.0 15.5 13.7 12.3 16.6 15.4
Sales and marketing.... 42.3 40.2 41.7 40.5 37.7 30.6
General and
administrative........ 7.9 8.2 7.3 8.6 7.4 9.3
----- ----- ----- ----- ----- -----
Total operating
expenses............ 65.2 63.9 62.7 61.4 61.7 55.4
----- ----- ----- ----- ----- -----
Income from operations... 7.9 11.2 12.6 14.8 15.3 23.1
Other income (expense):
Interest income........ 0.4 0.4 0.6 0.8 2.1 2.5
Interest expense....... (0.6) (0.4) (0.3) (0.3) (0.2) (0.2)
Other.................. 0.5 0.4 0.3 0.4 0.3 0.3
----- ----- ----- ----- ----- -----
Total other income... 0.3 0.4 0.6 0.9 2.2 2.6
Income before provision
for income taxes........ 8.2 11.6 13.2 15.7 17.5 25.7
Provision for income
taxes................... 0.8 0.9 1.2 2.6 2.7 4.1
----- ----- ----- ----- ----- -----
Net income............. 7.4% 10.7% 12.0% 13.1% 14.8% 21.6%
===== ===== ===== ===== ===== =====
</TABLE>
QUARTERLY TRENDS
Gross profit generally increased from quarter to quarter as a percentage of
net revenues over the six quarter period primarily as a result of a shift in
product mix to higher margin products. Research and development expenses
increased in the first two fiscal quarters of 1996, primarily as a result of
increased headcount and associated personnel related costs. In addition, for
the first fiscal quarter of 1996, the Company incurred an expense of
approximately $250,000 for certain acquired technology that had not reached
technical feasibility and did not have alternative future uses. Sales and
marketing expenses increased in absolute dollars in the first two quarters of
fiscal 1996 as a result of the significant increase in revenues but decreased
as a percentage of revenues primarily due to the increased efficiency of the
sales force.
The Company expects to recognize a loss in the quarter ending June 29, 1996,
due to the approximately $9.6 million in-process research and development
write-off resulting from the Acquisition. In addition, the Company's operating
expenses are expected to increase due to the development of emulation systems
and the amortization of intangibles resulting from the Acquisition.
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. 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."
19
<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 the first six months of fiscal 1996 and during fiscal
1995 and fiscal 1994.
Operating activities. The Company's operating activities provided cash of
$7.1 million in the first six months of fiscal 1996, $4.5 million in fiscal
1995 and $1.4 million in fiscal 1994 and used cash of $686,000 in fiscal 1993.
For the six months ended March 30, 1996, net cash provided by operating
activities was primarily due to net income plus depreciation and amortization,
a reduction in outstanding accounts receivable, increased deferred maintenance
revenues and accounts payable partially offset by an increase in inventories
and a decrease in accrued commissions and other accrued liabilities. For
fiscal 1995 and 1994, net cash provided by operating activities resulted
primarily from net income adjusted for depreciation and amortization, which
was partially offset by increases in accounts receivable, inventories and
accounts payable associated with increases in revenue activity. In fiscal
1993, the net cash used in operating activities was primarily the result of
net losses.
Investing activities. For the six months ended March 30, 1996 net cash used
in investing activities was approximately $11.6 million due primarily to the
advance to VMW of approximately $1.3 million and the net purchases of
approximately $9.2 million of short-term investments and purchases of $1.2
million of equipment, primarily engineering workstations. Other than the
purchase and sales and maturities of short-term investments, investment
activities were comprised primarily of capital expenditures of $1.1 million,
$959,000 and $1.0 million for fiscal 1995, 1994 and 1993, respectively.
Capital expenditures were primarily for evaluation equipment, engineering
workstations and the Company's own hardware simulators which were used for
research and development and benchmarking purposes.
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 defines technological feasibility as completion of a working model.
For the six months ended March 30, 1996 and April 1, 1995, such capitalizable
costs were insignificant. Accordingly, the Company has charged all such costs
to research and development expenses for these periods. For fiscal 1995 and
1994, the Company did not capitalize any costs for software. For fiscal 1993,
the Company capitalized $513,000 for the development of the VHDL simulator and
other Voyager series products.
Financing activities. Net cash provided by financing activities for the six
months ended March 30, 1996 was $10.4 million which was a result of the
completion of the Company's public stock offering in October 1995 and the
exercise of options by Company employees. Proceeds from the sale of 1,150,000
shares of Common Stock, net of offering costs, were approximately $10.4
million. During the six months ended March 30, 1996, and during fiscal 1995,
1994 and 1993, the Company received cash of $664,000, $1.1 million, $68,000
and $50,000, respectively, upon the exercise of options to purchase Common
Stock. Offsetting the increases in cash provided by financing activities, were
principal payments of approximately $738,000, $754,000, $683,000 and $335,000
for the six months ended March 30, 1996 and fiscal years ending 1995, 1994 and
1993, respectively.
The Company's primary unused sources of funds at March 30, 1996 consisted of
$22.8 million of cash, cash equivalents, and short-term investments.
Subsequent to March 30, 1996, the Company paid approximately $10.0 million in
cash to the preferred stockholders of VMW pursuant to the Acquisition. The
Company expects to make capital expenditures throughout the remainder of
fiscal 1996, as expected headcount additions will require additional capital
expenditures. 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. To the extent that additional capital is raised through the
sale of additional equity or convertible debt securities, the issuance of such
securities could result in dilution to the Company's stockholders.
20
<PAGE>
BUSINESS
THE COMPANY
IKOS develops, manufactures, markets and supports hardware and software
systems for the verification of IC designs. The Company's products are
designed to enable its customers to verify complex IC designs more rapidly and
accurately than existing software-based simulation tools. The Company sells
its products to a broad range of customers in the communications,
multimedia/graphics, semiconductor, computer, aerospace and consumer
electronics industries, such as Lucent Technologies, Motorola, NEC, S3,
Scientific Atlanta, SGS-Thomson Microelectronics, Siemens and Texas
Instruments.
In May 1996, the Company acquired VMW, which was founded in late 1993 to
develop and market logic emulation systems for the verification of complex ICs
and IC-based systems. The Company believes that, despite the potential of
emulation to shorten IC and system development time, the high cost and
difficulty of use of existing emulation systems have impaired broad acceptance
of emulation. VirtualWires, the set of proprietary methods under exclusive
license from MIT, is being developed to address certain input/output
constraints and timing issues through two processes referred to as
interconnect resynthesis and timing resynthesis.
INDUSTRY BACKGROUND
The EDA industry has provided technology and automation tools to the IC
industry which have enabled, to a significant degree, the advances in IC
designs that have occurred within the semiconductor industry over the last two
decades. However, while EDA design tools such as high level design languages
and synthesis have brought greater efficiency and productivity to the IC
design process, advances in EDA verification technology have not kept pace
with the requirements for verifying more complex IC designs. SEMATECH, Inc.
estimates that over the four decades through 2010, IC complexity, measured in
transistors per logic IC, will grow at 58% compounded annually, while design
engineer productivity will grow at only 21% annually. IKOS believes that
insufficient verification capability is a significant contributor to this
productivity gap.
As the density and complexity of electronic system designs increase, so does
the need for more thorough verification in the IC design process.
Verification, which is the assessment of the functionality and behavior of an
IC design, is used to test compliance with timing constraints, detect logic
errors and predict device speed, power consumption and a range of other
characteristics. A number of trends in the IC industry are currently in force
which are causing verification to receive greater attention in the design
process. First, as designers work at higher levels of abstraction and design
more gates, the task of directly evaluating the entire design is becoming
extremely difficult. This causes designers to seek tools which perform
verification for them. Second, as IC process geometries grow finer and device
speeds increase, the margin for error grows smaller, thus placing a premium on
verification capability. Finally, as system designers develop a broader range
of systems for a wider range of applications, they have become concerned with
not just functionality, but also IC speed and power dissipation.
Design verification includes modeling of a circuit in software (simulation),
and modeling of a circuit in hardware (emulation). Simulation utilizes
computer models of circuit logic and test programs to evaluate the
functionality and performance of the designed electronic circuits before
committing to prototyping or production of the actual design. In the
simulation environment, the individual components of an IC may be represented
at different levels of detail or hierarchy, ranging from transistors or gates
(typically groups of four transistors) to functional or behavioral blocks,
which are commonly comprised of a large number of gates. Before the advent of
language-based design, the traditional approach to simulation was at the gate
level. However, language-based or functional simulation creates an opportunity
to simulate designs earlier in the design cycle, 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. 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
21
<PAGE>
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 a higher, or 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.
Logic emulation is the process of utilizing reprogrammable ICs, typically
field programmable gate arrays ("FPGAs"), as a hardware model of an IC prior
to its silicon fabrication. This model runs orders of magnitude faster than a
software-based simulation model and permits the verification of the design
more quickly and comprehensively. This virtual silicon prototype can be
plugged into the system for which the IC is designed, and the system can then
be tested using software to verify functionality. Logic emulation can shorten
IC and system development by allowing developers to engage in concurrent
design and verification of both the software and hardware components of the
designed system. The Company believes that, despite the potential of emulation
to shorten IC and system development time, the high cost and difficulty of use
of existing emulation systems have impeded their widespread adoption.
The verification of a complex IC is an extremely time-consuming process, and
inadequate verification can result in lost market opportunity or significant
costs. Complicating the problem is the inability to determine when an IC
design has been sufficiently verified. Due to competitive market pressures, IC
designers are investing in a greater number and wider range of verification
tools.
THE IKOS SOLUTION
The Company's mission is to be the leading supplier of tools for the
verification of IC designs with 100,000 or more gates, which are referred to
as complex ICs. Complex IC designs are becoming a larger part of the custom
and semi-custom IC market. According to an industry source, complex designs
for ASICs will grow to a majority of the ASIC designs within the next four
years. The Company believes that rapid, comprehensive and predictable
verification of complex ICs can best be achieved by simulation systems
incorporating hardware and software and easy-to-use, cost-effective emulation
systems.
To date, the Company has concentrated on providing dedicated hardware and
software simulation systems that enable iterative, mixed-level simulation.
Under the IKOS design approach, simulation begins at the behavioral level so
that architectural problems can be identified before the time and effort is
expended to implement the gate level design. Simulation is then performed at
the gate level to address timing problems. The designer may then iteratively
simulate at the behavioral level and the gate level to ensure that the design
is correct. In addition, this IKOS approach enables 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 simulate at
both levels of abstraction simultaneously, thereby reducing the time required
to simulate a complex IC design.
In order to broaden the Company's verification product offering to extend
from design concept stage to prototype stage, the Company is developing
emulation systems that incorporate technology under development acquired from
VMW. The Company seeks to use this technology, when fully developed, to
provide cost-effective emulation systems that are easy to use and utilize
standard off-the-shelf FPGA components which automate and simplify certain
expensive and time consuming steps in the emulation of an IC design.
22
<PAGE>
IKOS STRATEGY
The Company's strategy is to serve the needs of a growing universe of IC
designers for fast, accurate verification of complex IC designs through a
family of hardware and software simulation and emulation 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 and 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.
Broaden market for logic emulation. The Company will seek to broaden the
market for logic emulation by providing easier to use and less costly
emulation products. In addition, the Company intends to market its emulation
systems to ASIC designers that to date have not widely used emulation
products. The Company believes that its experience in developing and marketing
hardware-accelerated simulation systems will enhance its ability to develop
and market competitive emulation systems.
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 simulation systems
accept designs created in VHDL and Verilog-XL, 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. In addition, the Company believes that its interface with commonly
used design environments facilitates the adoption and use of its products.
Furthermore, the Company intends to utilize standard off-the-shelf FPGAs in
its emulation systems.
Develop strategic relationships with key accounts. The Company sells its
products to a broad range of customers in the communications,
multimedia/graphics, semiconductor, 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.
In addition, the Company believes that the success of its relationships with
these customers is evidenced by repeat orders from these key relationships.
Provide comprehensive cell libraries and library development tools. The
Company believes that its IC cell libraries for its simulation systems greatly
facilitate ease of use and accuracy of verification systems and that the
extensive libraries and library development tools provided by the Company are
a competitive advantage over other verification solutions. The Company has
fostered relationships with IC manufacturers such as American Microsystems,
Inc., LSI Logic Corporation, NEC Corporation, OKI Semiconductor, Toshiba,
Texas Instruments Incorporated and VLSI Technology, Inc. in order to obtain
the design specifications necessary for the development of cell libraries and
library development tools.
23
<PAGE>
SIMULATION
To date, IKOS has marketed high performance IC design simulation systems
consisting of hardware and software. In the IKOS simulation system, certain
simulation algorithms are implemented in hardware to enhance performance. The
software components of the IKOS solution include behavioral-level simulation
software, interfaces with other EDA tools and cell libraries and library
development tools for modeling of ICs. IKOS simulation systems run on Sun
Microsystems, Inc. ("Sun") and Hewlett-Packard Company ("Hewlett-Packard")
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. 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.
Gemini CSX. 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.
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 Nsim family of products supports
functional verification for IC designs with between 300,000 and four million
gates and full-timing simulation for deep sub-micron ICs with between 50,000
and four million gates of random logic.
24
<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 works
with IC manufacturers such as American Microsystems, Inc., LSI Logic
Corporation, NEC Corporation, OKI Semiconductor, Toshiba, Texas Instruments
Incorporated and VLSI Technology, Inc. to enable customers to simulate complex
designs using IKOS systems prior to fabrication of the ICs by these
manufacturers.
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.
The Company's ongoing product development activities include the enhancement
of current products 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
development of new technologies for use in future products.
EMULATION
The Company seeks to develop emulation products utilizing VirtualWires, a
set of proprietary emulation methods under exclusive license from MIT.
VirtualWires is being developed to address certain input/output constraints
and timing issues through two processes referred to as interconnect
resynthesis and timing resynthesis. Interconnect resynthesis is intended to
overcome FPGA pin limitations by sharing or multiplexing each physical
input/output wire to carry more than one signal. This approach is intended to
allow for more automated and efficient compilation of the design on fewer
FPGAs, potentially lowering the cost of the emulation system and enhancing its
ease of use. Timing resynthesis can compensate for FPGA timing variations by
converting a user's design that may incorporate multiple synchronous or
asynchronous clocks into a high frequency single-clock synchronous design with
identical functionality. This approach is intended to address timing issues by
transforming a user's design into one that is predictable and easy to
implement.
The Company is developing a modular, scalable system for emulation of one or
more complex ICs. This system is being developed to include three principal
components: compiler software, a reconfigurable logic emulator, and a third-
party logic analyzer. The compiler software, executing on an engineering
workstation from either Sun or Hewlett-Packard, is expected to accept a
netlist description of the user's design and generate from it the programming
data which controls the behavior of the logic emulator. The logic emulator is
expected to be connected to the user's target system via cables and, once
programmed, operate as a surrogate for the IC being emulated. The emulator's
internal operation is being designed to be viewed with the aid of a commercial
logic analyzer available from Hewlett-Packard.
25
<PAGE>
CUSTOMERS
IKOS sells its products to a broad range of companies including those in the
communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries. One customer, Advanced Micro Devices, Inc.,
accounted for 16.2% of the Company's net revenues for the first six months of
fiscal 1996. One distributor, Itochu & Co., Ltd. in Japan accounted for 14.0%
and 14.6%, respectively, of the Company's net revenues for the first six
months of fiscal 1996 and fiscal 1995. One customer, Motorola, Inc., and one
distributor, Itochu & Co., Ltd., accounted for 17.7% and 10.1%, respectively,
of the Company's net revenues in fiscal 1994. A number of the Company's
customers use IKOS products for multiple applications. Certain of the
Company's customers who have purchased at least $100,000 of products in the
fiscal 1995 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
. Alcatel Network . Chips & Technologies, . American Microsystems,
Systems, Inc. Inc. Inc.
. AT&T Corp. . MicroUnity Systems . LSI Logic Corp.
. Cabletron Systems, . S3 Incorporated . Mitsubishi Electronics
Inc. . Silicon Graphics, Inc. America, Inc.
. Motorola, Inc. . SGS-Thomson
. Siemens AG Microelectronics
. Tellabs Inc. . Texas Instruments
Incorporated
COMPUTERS/PERIPHERALS AEROSPACE CONSUMER ELECTRONICS
. Acer Incorporated . Allen-Bradley Co. . Fuji-Xerox
. Cyrix Corp. . Hughes Aircraft Co. . General Instrument
. Hewlett-Packard . Raytheon Co. Corp.
Company . Rockwell International . Scientific Atlanta,
. NEC Corporation Corp. Inc.
. Philips Semiconductor . Sony America Corp.
. Toshiba America 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, New
Hampshire, New Jersey and Texas. IKOS sells directly in Japan through a
wholly-owned subsidiary and in Europe through wholly-owned subsidiaries in
Germany and England and a sales office in France. In addition, the Company
sells and supports its products through distributors in Asia and certain
European regions. 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 verification systems.
International sales accounted for approximately 31.1% and 30.9%,
respectively, of the Company's net revenues for the six month periods ended
March 30, 1996 and April 1, 1995, respectively, and 36.9%, 25.8% and 20.1% of
the Company's net revenues in fiscal 1995, 1994 and 1993, 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 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
26
<PAGE>
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 maintenance and support on a contractual basis after
the initial product warranty has expired. Maintenance and support are provided
on an on-site or on a return and repair basis. The Company also provides
maintenance and support via a toll-free telephone line, and customers with
maintenance coverage 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 simulation 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 simulation 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 simulation systems use proprietary ASICs that are
currently manufactured solely by AMI and subassemblies that are manufactured
solely 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."
RESEARCH AND DEVELOPMENT
The Company's research and development organization included 41 engineers at
March 30, 1996 of whom 27 were engaged principally in software development.
During the first six months of fiscal 1996, the Company spent approximately
$3.3 million on research and development and during fiscal 1995, 1994 and
1993, the Company spent approximately $4.0 million, $3.9 million and $7.9
million, respectively, on research and development. 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 simulation
and emulation products. To date, substantially all of the Company's revenue
has resulted from sales of hardware-assisted simulation products. The Company
currently experiences competition from hardware-assisted simulation-based
systems sold by Zycad and traditional software verification methodologies. To
the extent that the Company competes in the market for emulation products in
the future, it will experience competition from emulation systems sold by
Quickturn and other EDA companies. The Company expects competition in the
market for verification tools to increase as other companies attempt to
introduce new products such as cycle-based software simulation products and
product enhancements. Moreover, the Company competes,
27
<PAGE>
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.
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, has licensed rights under certain patent applications relating
to VirtualWires, and has filed additional patent applications. However, there
can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the
Company's 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 $1.25
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 and diversion of management efforts 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 relies on certain software and other technologies 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 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
28
<PAGE>
licenses could result in delays or reductions in product shipments until
equivalent software or technology could be identified, licensed and
integrated, which would adversely affect the Company's operating results. In
particular, the Company licenses certain VirtualWires emulation patent rights
from MIT. This license is exclusive for a period ending on the earlier of the
expiration of eight years after the first commercial sale or use of a licensed
patent or process or December 22, 2004, and thereafter becomes nonexclusive.
MIT may terminate this license if the Company fails to meet certain minimum
net sales milestones or upon certain other material breaches of the license
agreement that remain uncured after 90 days' notice of such breach. Loss of
this license could materially adversely affect the Company's future operating
results. See "Risk Factors--Proprietary Rights."
EMPLOYEES
As of March 30, 1996, the Company employed a total of 144 persons,
consisting of 76 in marketing, sales and support, 9 in manufacturing, 41 in
research, development and engineering, and 18 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 and Management of Growth."
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. The Company also leases a development facility in Cambridge,
Massachusetts and a sales and development facility in Waldwick, New Jersey. In
addition, the Company leases sales office space domestically in Arizona,
California, New Hampshire 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.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, titles and ages of the executive officers and directors of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<C> <C> <S>
Gerald S. Casilli.......................... 57 Chairman of the Board
Ramon A. Nunez............................. 41 Chief Executive Officer,
President and Director
Daniel R. Hafeman.......................... 47 Chief Technical Officer
Joseph W. Rockom........................... 57 Chief Financial Officer, Vice
President of Finance and
Administration, and
Secretary
Paul Offredi............................... 51 Senior Vice President,
Product Operations
Stephen M. McLaughin....................... 48 Vice President of
Manufacturing
Lawrence A. Melling........................ 39 Vice President of Marketing
John Stressing............................. 52 Vice President of Worldwide
Sales
Lutz P. Henckels (1)....................... 55 Director
James R. Oyler (1)......................... 50 Director
Glenn E. Penisten (1)...................... 64 Director
</TABLE>
- --------
(1) Members of the Audit and Compensation Committees
Mr. Casilli has served as Chairman of the Board of Directors of the Company
since July 1989 and served as Chief Executive Officer from April 1989 to
August 1995. He has served as a director since 1986. From January 1986 to
December 1989 he was a general partner of Trinity Ventures, Ltd., a venture
capital firm that was a former investor in the Company. Mr. Casilli was a
general partner of Genesis Capital, a venture capital firm, from February 1982
to 1990. Mr. Casilli founded Millennium Systems, a manufacturer of
microprocessor development systems, in 1973 and served as its President and
Chief Executive Officer until 1982.
Mr. Nunez was appointed Chief Executive Officer in August 1995. Mr. Nunez
had been President, Chief Operating Officer and Director of the Company since
October 1994. He had served as Vice President of Worldwide Sales since July
1993. Mr. Nunez joined the Company in April 1990 as Vice President of North
American Sales after five years in sales management with Zycad Corporation.
Earlier he was branch sales manager for Cadnetix (now part of Intergraph) in
Southern California.
Mr. Hafeman, a founder of the Company, has served as Chief Technical Officer
since March 1996. Mr. Hafeman served as Vice President of Engineering from
August 1989 to March 1996. 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. Rockom has served as Chief Financial Officer and Vice President of
Finance and Administration since September 1986. Mr. Rockom has also served as
the Company's Secretary since April 1995. Before joining the Company, Mr.
Rockom spent seventeen years at 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 manufacturer of electronic
test equipment. From 1987 until 1991, Mr. Offredi was the Senior Vice
President of Operations for Zycad Corporation.
Mr. McLaughin 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.
30
<PAGE>
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, Inc., a manufacturer of computer networking
equipment. Prior to his relationship with Corvus Systems, Inc., he was a
production and circuit engineer with Hewlett-Packard for four years.
Mr. Stressing has served as Vice President of Worldwide Sales since August
1995. From October 1993 to August 1995 he served as European Sales Director
and Vice President, International Sales. From January 1989 to November 1993 he
was the proprietor of Premier Consultants, a recruitment and sales agency for
IKOS' products in Scandinavia. Prior to founding Premier Consultants, Mr.
Stressing was employed in various sales capacities by Zycad Corporation for
four years, by Daisy Systems for one year, by Teradyne for four years, and by
British Aerospace for thirteen years.
Mr. Henckels has served as a member of the Board since February 1994. Mr.
Henckels has been President of LeCroy Corporation, a supplier of test and
measurement equipment, since 1993 and Chief Executive Officer since 1994. Mr.
Henckels is also a director of LeCroy Corporation. Before joining LeCroy
Corporation he was President of U.S. Operations for Racal-Redac, Inc. from
1989 to 1993. From 1983 to 1989 Mr. Henckels was President and Founder of HHB
Systems, an EDA company. Before that he was President and founder of HHB
Softron, an engineering consulting firm.
Mr. Oyler has served as a member of the Board since October 1991. He is
presently President, Chief Executive Officer and Director of Evans &
Sutherland Computer Corporation. Evans & Sutherland develops, manufactures and
markets high performance systems for various applications with demanding
graphics requirements. Prior to his position with Evans & Sutherland, Mr.
Oyler was president of AMG, Inc., a process machine design company. From 1976
to 1990 Mr. Oyler worked at Harris Corporation, most recently as Senior Vice
President and Sector Executive, where he was responsible for nine operating
divisions. Prior to that he held positions as consultant and associate with
Booz, Allen & Hamilton in New York, a consulting company.
Mr. Penisten has been a member of the Board since September 1985. Since
September 1985 he has been a general partner of Alpha Partners, a venture
capital firm and former investor in the Company. From January 1985 to August
1985, he was a general partner of P & C Venture Partners, a venture capital
firm. From 1982 to 1985, he was a Senior Vice President at Gould/AMI. From
1976 to 1982, Mr. Penisten served as Chief Executive Officer of AMI, a
semiconductor manufacturer. Mr. Penisten is also a director of Bell
Microproducts, Inc. Pinnacle Systems, Inc. and Superconductor Technologies.
In March 1996, William B. Fazakerly resigned his position with the Company
as Chief Technical Officer to pursue new business opportunities.
31
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding each Selling
Stockholder, each of whom is a former stockholder of VMW.
<TABLE>
<CAPTION>
SHARES TO
NAME OF SELLING SHARES BENEFICIALLY BE SOLD IN SHARES BENEFICIALLY
STOCKHOLDER OWNED PRIOR TO OFFERING OFFERING OWNED AFTER OFFERING
--------------- ----------------------- ---------- --------------------
<S> <C> <C> <C>
Melissa Barton.......... 59 59 0
Jonathan W. Babb........ 5,732 5,732 0
MIT..................... 14,020 14,020 0
Allen H. Michels(1)..... 25,997 25,997 0
Concord Partners II,
L.P.................... 65,851 65,851 0
Dillon, Read & Co., Inc.
as agent............... 9,471 9,471 0
Lexington Partners IV,
L.P.................... 948 948 0
</TABLE>
- --------
(1) Pursuant to the exercise of stock options.
32
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Needham & Company, Inc. ("Needham &
Company"), SoundView Financial Group, Inc. and Unterberg Harris are acting as
representatives (the "Representatives"), have severally agreed to purchase
from the Company and the Selling Stockholders, and the Company and the Selling
Stockholders have agreed to sell to each Underwriter, the aggregate number of
shares of Common Stock set forth opposite their respective names on 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.........................................
SoundView Financial Group, Inc.................................
Unterberg Harris...............................................
---------
Total........................................................ 1,122,078
=========
</TABLE>
The Company and the Selling Stockholders have 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 has granted an option to the Underwriters exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum
of 168,312 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
33
<PAGE>
Common Stock offered hereby. To the extent the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock to be purchased by such
Underwriters, as shown in the above table, bears to the total shown.
In connection with this offering, certain underwriters and selling group
members (if any) or their respective affiliates may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 10b-6A under the Exchange Act. Passive market making consists of
displaying bids in the Nasdaq National market limited by the bid prices of
independent market makers and purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day
are generally limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified prior
period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above
that which might otherwise prevail and, if commenced, may be discontinued at
any time.
In the Underwriting Agreement, the Company and the Selling Stockholders have
agreed to indemnify the Underwriters against certain liabilities that may be
incurred in connection with this offering, including liabilities under 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 and the Selling Stockholders 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.
Needham & Company, one of the Representatives, acted as financial advisor to
the Company with respect to the Acquisition. In consideration of such
services, the Company has agreed to pay to Needham & Company a financial
advisory fee and has issued to Needham & Company a warrant to purchase 25,000
shares of Common Stock.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company and the Selling Stockholders by Gray Cary Ware & Freidenrich, A
Professional Corporation, Palo Alto, California. Pillsbury Madison & Sutro
LLP, San Francisco, California, is 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. at October 1,
1994 and September 30, 1995, and for each of the three years in the period
ended September 30, 1995, appearing in this Prospectus and Registration
Statement, and appearing in IKOS Systems, Inc.'s Annual Report on Form 10-K
for the year ended September 30, 1995 incorporated herein by reference, have
been audited by Ernst & Young LLP as set forth in their report thereon,
appearing elsewhere herein, and as set forth in their report thereon included
in IKOS Systems, Inc's. Annual Report on Form 10-K and incorporated herein by
reference. Such consolidated financial statements are included in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
34
<PAGE>
The financial statements of VMW (a development stage enterprise) at December
31, 1994 and 1995, and for the years then ended and for the period from
October 6, 1993 (date of inception) to December 31, 1995 appearing in this
Prospectus and Registration Statement have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their report dated April 12,
1996, except for Note 10, as to which the date is May 23, 1996, (which report
included an explanatory paragraph regarding the substantial doubt about the
entity's ability to continue as a going concern) accompanying such financial
statements appearing elsewhere herein and in the Registration Statement, in
reliance upon such reports of such firm which report is given upon their
authority as experts in accounting and auditing.
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IKOS SYSTEMS, INC.
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
VIRTUAL MACHINE WORKS, INC.
Report of Coopers & Lybrand L.L.P., Independent Accountants.............. F-16
Balance Sheets........................................................... F-17
Statements of Operations................................................. F-18
Statements of Stockholders' Deficit...................................... F-19
Statements of Cash Flows................................................. F-20
Notes to Financial Statements............................................ F-21
IKOS SYSTEMS, INC. AND VIRTUAL MACHINE WORKS, INC. UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Combined Financial Information............. F-29
Unaudited Pro Forma Condensed Combined Balance Sheet..................... F-30
Unaudited Pro Forma Condensed Combined Statement of Operations........... F-31
Notes to Unaudited Pro Forma Condensed Combined Financial Statements..... F-33
</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 1, 1994 and September 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of IKOS Systems, Inc. at October 1, 1994 and September 30, 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
October 17, 1995
F-2
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 1, SEPTEMBER 30, MARCH 30,
1994 1995 1996
---------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 3,422 $ 7,305 $ 13,166
Short-term investments.................. 560 450 9,616
Accounts receivable (net of allowances
for doubtful accounts of $122, $171 and
$221, respectively).................... 4,884 6,046 3,857
Inventories............................. 1,050 1,328 2,121
Prepaid expenses and other assets....... 222 271 280
-------- -------- --------
Total current assets................ 10,138 15,400 29,040
Equipment and leasehold improvements
Office and evaluation equipment......... 2,576 2,730 3,197
Machinery and equipment................. 4,664 4,985 5,131
Leasehold improvements.................. 267 287 303
-------- -------- --------
7,507 8,002 8,631
Less allowances for depreciation and
amortization....................... (5,859) (6,363) (6,292)
-------- -------- --------
1,648 1,639 2,339
Advance and other assets.................. 343 113 1,455
-------- -------- --------
$ 12,129 $ 17,152 $ 32,834
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 1,909 $ 1,613 $ 2,719
Accrued payroll and related expenses.... 786 1,195 1,427
Accrued commissions..................... 650 697 186
Income taxes payable.................... 13 188 275
Other accrued liabilities............... 360 480 168
Deferred maintenance revenues........... 1,979 3,030 3,971
Current portion of long-term debt....... 591 688 450
-------- -------- --------
Total current liabilities........... 6,288 7,891 9,196
Long-term debt, less current portion...... 2,151 1,300 800
Accrued rent.............................. 214 251 248
Commitments...............................
Stockholders' equity
Preferred stock, $.01 par value; 10,000
shares authorized, none issued and
outstanding............................ -- -- --
Common stock, $.01 par value; 25,000
shares authorized, 5,504, 5,886 and
7,264 shares issued and outstanding,
respectively........................... 55 59 73
Additional paid-in capital.............. 25,960 27,034 38,115
Accumulated deficit..................... (22,539) (19,383) (15,598)
-------- -------- --------
Total stockholders' equity.......... 3,476 7,710 22,590
-------- -------- --------
$ 12,129 $ 17,152 $ 32,834
======== ======== ========
</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 SIX MONTHS ENDED
----------------------------------- ------------------
APRIL
OCTOBER 2, OCTOBER 1, SEPTEMBER 30, 1, MARCH 30,
1993 1994 1995 1995 1996
---------- ---------- ------------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues
Product............... $12,917 $17,886 $23,713 $10,534 $16,971
Maintenance........... 3,611 3,750 4,887 2,254 3,460
------- ------- ------- ------- -------
Total net revenues.. 16,528 21,636 28,600 12,788 20,431
Cost of revenues
Product............... 5,542 5,000 5,982 2,761 3,983
Maintenance........... 789 930 1,157 546 550
------- ------- ------- ------- -------
Total cost of
revenues........... 6,331 5,930 7,139 3,307 4,533
------- ------- ------- ------- -------
Gross profit........ 10,197 15,706 21,461 9,481 15,898
Operating expenses:
Research and
development.......... 7,896 3,861 3,999 1,954 3,268
Sales and marketing... 9,303 9,447 11,763 5,268 6,911
General and
administration....... 1,873 1,596 2,301 1,034 1,723
------- ------- ------- ------- -------
Total operating
expenses........... 19,072 14,904 18,063 8,256 11,902
------- ------- ------- ------- -------
Income (loss) from
operations............. (8,875) 802 3,398 1,225 3,996
Other income (expense):
Interest income....... 130 69 159 49 482
Interest expense...... -- (75) (107) (63) (42)
Other................. 48 140 117 58 59
------- ------- ------- ------- -------
Total other income.. 178 134 169 44 499
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes and extraordinary
credit................. (8,697) 936 3,567 1,269 4,495
Provision for income
taxes................... 53 95 411 106 710
------- ------- ------- ------- -------
Income (loss) before
extraordinary credit.... (8,750) 841 3,156 1,163 3,785
Extraordinary credit--
forgiveness of debt..... -- 664 -- -- --
------- ------- ------- ------- -------
Net income (loss)....... $(8,750) $ 1,505 $ 3,156 $ 1,163 $ 3,785
======= ======= ======= ======= =======
Earnings (loss) per
share:
Income (loss) before
extraordinary credit. $ (1.62) $ 0.15 $ 0.51 $ 0.20 $ 0.49
Extraordinary credit.. -- 0.12 -- -- --
------- ------- ------- ------- -------
Net income (loss)... $ (1.62) $ 0.27 $ 0.51 $ 0.20 $ 0.49
======= ======= ======= ======= =======
Common and common
equivalent shares used
in computing per share
amounts................ 5,415 5,651 6,151 5,897 7,681
======= ======= ======= ======= =======
</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'
SHARE AMOUNT CAPITAL DEFICIT RECEIVABLE EQUITY
----- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 26,
1992................... 5,405 $54 $25,851 $(15,294) $(8) $10,603
Net issuance of stock
under employee benefit
plans.................. 26 -- 42 -- -- 42
Payments on
stockholder's note
receivable............. -- -- -- -- 8 8
Net loss................ -- -- -- (8,750) -- (8,750)
----- --- ------- -------- --- -------
Balance at October 2,
1993.................... 5,431 54 25,893 (24,044) -- 1,903
Net issuance of stock
under employee benefit
plans.................. 73 1 67 -- -- 68
Net income.............. -- -- -- 1,505 -- 1,505
----- --- ------- -------- --- -------
Balance at October 1,
1994.................... 5,504 55 25,960 (22,539) -- 3,476
Net issuance of stock
under employee benefit
plans.................. 382 4 1,074 -- -- 1,078
Net income.............. -- -- -- 3,156 -- 3,156
----- --- ------- -------- --- -------
Balance at September 30,
1995.................... 5,886 59 27,034 (19,383) -- 7,710
Net issuance of stock
under employee benefit
plans (unaudited)...... 228 2 660 -- -- 662
Issuance of shares in
conjunction with public
offering (unaudited)... 1,150 12 10,421 -- -- 10,433
Net income (unaudited).. -- -- -- 3,785 -- 3,785
----- --- ------- -------- --- -------
Balance at March 30,
1996 (unaudited)....... 7,264 $73 $38,115 $(15,598) $-- $22,590
===== === ======= ======== === =======
</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 SIX MONTHS ENDED
----------------------------------- -------------------
OCTOBER 2, OCTOBER 1, SEPTEMBER 30, APRIL 1, MARCH 30,
1993 1994 1995 1995 1996
---------- ---------- ------------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)....... $(8,750) $ 1,505 $ 3,156 $ 1,163 $ 3,785
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization......... 2,628 2,024 1,259 684 493
Gain (loss) on
retirement of
equipment............ 6 (4) 16 2 19
Deferred rent......... 172 26 37 18 (3)
License delivery and
technology transfer
in exchange for debt. -- (344) -- -- --
Decrease of long-term
debt--forgiveness of
note................. 3,600 (750) -- -- --
Changes in operating
assets and liabilities
Accounts receivable... 1,756 (2,069) (1,162) (1,919) 2,189
Inventories........... (506) 415 (234) (65) (793)
Prepaid expenses and
other current assets. 20 (168) (49) (38) (9)
Other assets.......... (3) 12 (27) (12) (92)
Accounts payable...... 595 (169) (296) 283 1,106
Accrued payroll and
other expenses....... 80 128 409 13 232
Accrued commissions... (111) 357 47 (328) (511)
Income taxes payable.. (6) 4 175 (20) 87
Other accrued
liabilities.......... 23 (112) 120 (58) (312)
Deferred maintenance
revenues............. (190) 543 1,051 437 941
------- ------- ------- ------- --------
Net cash provided by
(used in) operating
activities......... (686) 1,398 4,502 160 7,132
Investing activities:
Purchases of equipment
and leasehold
improvements........... (1,037) (959) (1,053) (418) (1,212)
Capitalized software
development costs...... (513) -- -- -- --
Investment in Virtual
Machine Works, Inc. ... -- -- -- -- (1,250)
Purchase of short-term
investments............ (241) (400) (14) (14) (10,755)
Sales of short-term
investments............ 2,852 -- -- -- --
Maturities of short-
term investments....... 46 381 124 -- 1,589
------- ------- ------- ------- --------
Net cash provided by
(used in) investment
activities........... 1,107 (978) (943) (432) (11,628)
Financing activities:
Principal payments on
long-term borrowings... (335) (683) ( 754) (250) (738)
Borrowing under
promissory note........ -- 750 -- -- --
Sale of common stock.... 50 68 1,078 60 11,095
------- ------- ------- ------- --------
Net cash provided by
(used in) financing
activities........... (285) 135 324 (190) 10,357
------- ------- ------- ------- --------
Increase (decrease) in
cash and cash
equivalents............. 136 555 3,883 (462) 5,861
Cash and cash equivalents
at beginning of period.. 2,731 2,867 3,422 3,422 7,305
------- ------- ------- ------- --------
Cash and cash equivalents
at end of period........ $ 2,867 $ 3,422 $ 7,305 $ 2,960 $ 13,166
======= ======= ======= ======= ========
Supplemental disclosures
of cash flow
information:
Cash paid for income
taxes.................. $ 59 $ 91 $ 230 $ 126 $ 566
Cash paid for interest.. $ -- $ 75 $ 107 $ 63 $ 42
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: The Company develops, manufactures, markets and
supports hardware and software systems for the verification of integrated
circuit designs. The Company's strategy is to serve the needs of a growing
universe of IC designers for fast, accurate verification 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,
multimedia/graphics, semiconductor, computer, aerospace and consumer
electronics industries. The Company recently completed the acquisition of
Virtual Machine Works, Inc., a development stage company that is in the
process of developing a logic emulation system.
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, October 2,
1993, October 1, 1994 and September 30, 1995 are the fiscal year-ends for
1993, 1994 and 1995, respectively. Fiscal year ended October 2, 1993 was a 53-
week fiscal year.
Interim financial information: The financial statements and related notes as
of March 30, 1996 and for the six months ended April 1, 1995 and March 30,
1996 are unaudited and have been prepared on the same basis as the audited
financial statements. The unaudited financial statements 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 of operations for the interim period.
The results of operations for the six months ended March 30, 1996 are not
necessarily indicative of results for the full 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 and are stated at cost which approximates their fair
value. At September 30, 1995, cash equivalents consisted of money market
funds. At March 30, 1996, cash equivalents consisted of money market funds,
certificates of deposits and U.S. corporate overnight securities. 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.
F-7
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
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 results of operations during fiscal
1995. The fair values for marketable debt and equity securities are based on
quoted market prices.
The following is a summary of held-to-maturity securities at September 30,
1995 and March 30, 1996 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 30,
1995 1996
------------- ---------
<S> <C> <C>
U.S. Treasury Securities.......................... $ -- $ 1,987
U.S. Corporate Securities......................... 450 7,002
Mortgage-Backed Securities........................ -- 4,301
----- -------
$ 450 $13,290
===== =======
Amounts included in short-term investments........ $ 450 $ 9,616
Amounts included in cash and cash equivalents..... $ -- $ 3,674
</TABLE>
At September 30, 1995, the fair value of the held to maturity investment is
substantially equal to its fair value. At March 30, 1996, gross unrealized
gains approximated $89,000 and there were no gross unrealized losses resulting
in an estimated fair value of held-to maturity securities of approximately
$9,705,000.
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 1, SEPTEMBER 30, MARCH 30,
1994 1995 1996
---------- ------------- ---------
<S> <C> <C> <C>
Raw materials.......................... $ 259 $ 347 $ 164
Work-in-process........................ 502 563 1,497
Finished goods......................... 289 418 460
------ ------ ------
$1,050 $1,328 $2,121
====== ====== ======
</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.
Long-lived assets: In 1995 the Financial Accounting Standards Board released
the Statement of Financial Accounting Standard No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Adoption of SFAS 121 is not expected to
have a material impact on the Company's financial position or results of
operations.
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 defines technological feasibility as
completion of a working model. Such capitalized costs are amortized upon
product release on a straight-line basis over the estimated useful life of two
years or the ratio of current revenue to the total of current and anticipated
future revenues, whichever is greater. For fiscal 1993, the Company
capitalized approximately $513,000. For fiscal years 1994 and 1995, and for
the six months ended April 1, 1995 and March 30, 1996, 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 1993, 1994 and 1995 and for the six months ended April 1, 1995, the
Company
F-8
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
amortized $662,000, $864,000, $257,000 and $171,000, respectively, of
previously capitalized software development costs. As all capitalized costs
were fully amortized in fiscal 1995, no amounts were amortized during the six
months ended March 30, 1996.
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.
Employee stock plans: The Company accounts for its stock option and employee
stock purchase plans in accordance with provisions of the Accounting
Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board released the
Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for
Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and is
effective for fiscal years beginning after December 15, 1995. The Company
expects to continue to account for its employee stock plans in accordance with
the provisions of APB 25. Accordingly, SFAS 123 is not expected to have any
material impact on the Company's financial position or results of operations.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of liabilities and disclosure
of contingent assets and liabilities at the due date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates relate to the useful lives of fixed assets,
allowances for doubtful accounts and customer returns, inventory reserves and
other reserves. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Net income (loss) per share: Net income (loss) per share is based on the
weighted average number of common shares outstanding during the period. Common
equivalent shares from dilutive options have been included in the computation
using the treasury stock method.
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
OCTOBER 1, SEPTEMBER 30, MARCH 30,
1994 1995 1996
---------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt obligation to Racal-Redac, Inc.
payable in sixteen quarterly payments
through 1998............................ $2,100 $1,550 $1,250
Line of credit arrangement with leasing
company paid over 36 months and bearing
interest at 1.45% per month............. 642 438 --
------ ------ ------
2,742 1,988 1,250
Less current portion..................... (591) (688) (450)
------ ------ ------
Long-term debt........................... $2,151 $1,300 $ 800
====== ====== ======
</TABLE>
F-9
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
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 March 30, 1996 all amounts
outstanding had been repaid.
Total payments for all debt over the next three fiscal years are as follows
(in thousands):
<TABLE>
<CAPTION>
RACAL- EQUIPMENT
AS OF SEPTEMBER 30, 1995 REDAC LINE TOTAL
------------------------ ------ --------- ------
<S> <C> <C> <C>
1996.............................................. $ 450 $238 $ 688
1997.............................................. 750 200 950
1998.............................................. 350 -- 350
------ ---- ------
Total........................................... $1,550 $438 $1,988
====== ==== ======
</TABLE>
3. COMMITMENTS
Non cancelable operating leases include building leases which expire in
seven years. 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.
Rent expense approximated $750,000, $763,000 and $901,000, in fiscal 1993,
1994 and 1995, respectively, and approximately $381,000 and $458,000 and for
the six months ended April 1, 1995 and March 30, 1996, respectively. The
Company subleases certain facilities. This sublease expires in 1997. Sublease
rental income was approximately $48,000, $140,000 and $117,000 in fiscal 1993,
1994 and 1995, respectively and approximately $58,000 and $59,000 for six
months ended April 1, 1995 and March 30, 1996, respectively. Future minimum
rentals from subleases are approximately $123,000.
F-10
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
Future minimum payments under non-cancelable operating leases at September
30, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 AMOUNT
------------------ ------
<S> <C>
1996.................................................................. $ 599
1997.................................................................. 629
1998.................................................................. 659
1999.................................................................. 694
and thereafter........................................................ 731
------
$3,312
======
</TABLE>
4. STOCKHOLDERS' EQUITY
Common stock: In October 1995, the Company sold 1,150,000 shares of common
stock in a public offering resulting in net proceeds to the Company of
approximately $10,450,000.
Stock option plans: In 1988, the Company established a Stock Option Plan
(the "1988 Plan" which provides for the granting of options to employees or
directors to purchase shares of the Company's common stock. In fiscal year
1996, the Company replaced the 1988 Stock Option Plan by establishing the 1995
Stock Option Plan (the "1995 Plan"). The terms of the 1995 Plan are similar to
the 1988 Plan. Any shares remaining available for grant under the 1988 plan
were converted to the 1995 Plan and an additional 750,000 shares were reserved
for future grants under the 1995 Plan.
The following table summarizes the activity for the stock options plans (in
thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS AND RIGHTS OUTSTANDING
--------------------------------------
NUMBER AGGREGATE PRICE
OF SHARES EXERCISE PRICE PER SHARE
--------- -------------- -------------
<S> <C> <C> <C>
Balance at September 26, 1992........... 800 $2,314 $0.350-$5.250
Granted............................... 282 1,220 3.125-4.625
Exercised............................. (26) (42) 0.350-3.875
Forfeitures........................... (160) (548) 0.350-5.250
----- ------
Balance at October 2, 1993.............. 896 2,944 0.350-5.250
Granted............................... 635 2,296 3.375-4.750
Exercised............................. (73) (68) 0.350-4.000
Forfeitures........................... (185) (721) 0.350-5.000
----- ------
Balance at October 1, 1994.............. 1,273 4,451 0.350-5.250
Granted............................... 391 2,526 3.500-13.250
Exercised............................. (410) (1,356) 0.350-6.000
Forfeitures........................... (48) (235) 3.000-9.250
----- ------
Balance at September 30, 1995 1,206 5,386 0.350-13.250
Granted............................... 354 3,388 9.125-16.00
Exercised............................. (228) (662) 0.350-10.250
Forfeitures........................... (54) (324) 3.00-11.125
----- ------
Balance at March 30, 1996............... 1,278 $7,788 $ 3.00-16.00
===== ======
</TABLE>
F-11
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
Exercisable options were approximately 514,000, 651,000 and 785,000 for
fiscal years ending 1993, 1994 and 1995 and approximately 507,000 at March 30,
1996.
Vesting provisions with respect to the Stock Option Plans are determined by
the Board of Directors at the date of grant. Generally, shares issued pursuant
to the Plan vest at 12 1/2% upon an employee's six-month employment date and
ratably thereafter in monthly installments over three and one-half years.
Included in the table are options to purchase approximately 72,000 shares of
common stock granted outside of the 1988 Stock Plan. These options were
granted to various employees and have rights and vesting provisions which are
the same as those granted pursuant to the plan.
Total shares reserved for grant under the plans total 2,893,000 of which
approximately 2,343,000 shares were granted leaving approximately 550,000
shares available for grant at March 30, 1996.
The Company has reserved approximately 1,719,000 shares of common stock for
future issuance under the stock option plans for option outstanding and
available for grant at March 30, 1996 and approximately 72,000 shares of
common stock for future issuance of shares granted outside of the option plan.
1995 Outside Directors Stock 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 approved in February 1996. A total of 100,000
shares of common stock has been reserved for issuance under the Directors
Plan. As of March 30, 1996, 37,500 shares had been granted to Directors under
the plan and are included in the table presented above.
1996 Stock Purchase Plan: In fiscal 1996, the 1996 Employee Stock Purchase
Plan (ESPP) was approved and 100,000 shares of common stock was reserved for
issuance under this plan. The ESPP provides that substantially all employees
may purchase stock at 85% of its fair value on certain specified dates via a
payroll deduction plan. Through March 30, 1996, no shares have been issued
under this plan
Preferred Stock Purchase Rights Plan: The Company has a Preferred Stock
Purchase Rights Plan (the Rights Plan) which provides existing stockholders
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 interest of
the stockholders. The Board of Directors of the Company has designated 500,000
share of Series G Preferred Stock, $0.01 par value per share, and has reserved
for such shares for issuance pursuant to the Company's Rights Plan.
5. EMPLOYEE SAVINGS AND INVESTMENT PLAN
During the first six months of fiscal 1996, the Company amended its 401(k)
savings and investment plan in which all employees, at least 21 years of age,
are eligible to participate. The amended plan allows for the Company to make
matching contributions based on an employee's elective deferrals. The matching
contributions may not exceed $1,500 per employee, and through March 30, 1996,
the matching contributions were approximately $69,000.
F-12
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
6. INCOME TAXES
The tax provision for continuing operations consists of the following (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------
OCTOBER 2, OCTOBER 1, SEPTEMBER 30
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal.............................. $-- $ 7 $ 90
State................................ 7 3 112
Foreign.............................. 46 85 209
--- --- ----
$53 $95 $411
=== === ====
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate (34% in 1993; 35% in 1994 and 1995) follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------
OCTOBER 2, OCTOBER 1, SEPTEMBER 30
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S.
statutory rate...................... $(2,957) $ 328 $ 1,249
Operating losses (utilized), not
utilized............................ 2,957 (328) (1,170)
Alternative minimum tax.............. -- 7 90
Foreign withholding tax.............. 46 85 130
State taxes.......................... 7 3 112
------- ----- -------
$ 53 $ 95 $ 411
======= ===== =======
</TABLE>
For the six month periods ended April 1, 1995 and March 30, 1996, income
taxes have been provided based upon estimated annualized effective tax rates
of 8.3% and 15.8%, respectively, applied to the earnings for the period. The
provisions for income taxes reflect the tax benefits of utilizing net
operating loss and tax credit carryovers.
As of September 30, 1995, the Company had federal and state net operating
loss carryforwards of approximately $10,000,000 and $400,000, respectively.
The Company also had federal and California research and development tax
credit carryforwards of approximately $1,000,000 and $300,000, respectively.
The net operating loss and credit carryforwards will expire at various dates
beginning in 1997 through 2009, if not utilized.
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 1996, as amended, an similar state provisions. The
annual limitation could result in the expiration of net operating losses and
credits before utilization.
F-13
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of October 1, 1994 and September 30,
1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 1, SEPTEMBER 30,
1994 1995
---------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 5,000 $ 3,500
Research credits.................................. 1,200 1,200
Capitalized software.............................. 2,800 1,600
Deferred revenue.................................. 733 1,200
Accrued expenses and reserves..................... (233) 700
------- -------
Total deferred tax assets......................... 9,500 8,200
Valuation allowance for deferred tax assets....... (9,500) (8,200)
------- -------
Net deferred tax assets........................... $ -- $ --
------- -------
</TABLE>
The net valuation allowance decreased by $800,000 and $1,300,000 during the
twelve months ended October 1, 1994 and September 30, 1995.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company has provided a full valuation
allowance against its net deferred tax assets due to uncertainties surrounding
their realization, primarily due to the Company having cumulative losses in
the last three years, which causes predictability of earnings in the early
future years to be uncertain.
7. 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, multimedia/graphics, semiconductor, 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, including export sales and
foreign operation net revenues, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS
----------------------------------- ENDED
OCTOBER 2, OCTOBER 1, SEPTEMBER 30, MARCH 30,
1993 1994 1995 1996
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Far East...................... $1,276 $2,511 $ 4,841 $3,244
Europe........................ 1,801 3,008 5,613 3,120
Other......................... 253 64 106 --
------ ------ ------- ------
$3,330 $5,583 $10,560 $6,364
====== ====== ======= ======
</TABLE>
F-14
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 30, 1996 AND FOR THE SIX MONTHS ENDED APRIL 1, 1995
AND MARCH 30, 1996 IS UNAUDITED)
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. In fiscal 1995, one distributor
accounted for approximately 15% of net revenues. For the six months ended
March 30, 1996, one customer and one distributor accounted for approximately
16% and 14% of net revenues.
Certain key components used in the Company's products are presently
available from sole or limited sources. The Company is dependent upon these
sources to deliver key components on a timely basis.
8. SUBSEQUENT EVENT
In May 1996, the Company completed the acquisition of Virtual Machine Works,
Inc. (VMW), a development stage company, The acquired company is a developer
of logic emulation systems. Under the purchase agreement, the Company will pay
approximately $10.0 million in cash and issue approximately 113,000 shares of
IKOS common stock to the VMW stockholders, options to purchase VMW stock will
be converted in options to purchase approximately 84,000 shares of IKOS common
stock, and the Company will pay acquisition costs of approximately $500,000.
In connection with the acquisition, the Company advanced VMW approximately
$1,250,000 in exchange for a note. The advance is included in other assets in
the accompanying financial statements. In connection with the acquisition, the
Company expects to take a charge of approximately $9.6 million for the
acquisition of in-process research and development being acquired.
The purchase price was allocated to the tangible and intangible assets of
VMW based on the fair market values of those assets using a risk adjusted
discounted cash flows approach. The evaluation of the underlying technology
and patent rights acquired considered the inherent difficulties and
uncertainties in completing the development, and thereby achieving
technological feasibility, and the risks related to the viability of and
potential changes in future target markets. The underlying technology and
patent rights had no alternative use (in other research and development
projects or otherwise) since the technology was acquired for the sole purpose
of developing emulation products.
During April 1996, in connection with the acquisition, the Company issued
warrants to purchase 25,000 shares of common stock at $23.50 per share in
return for professional services rendered. These warrants expire on April 19,
2001.
F-15
<PAGE>
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Virtual Machine Works, Inc.
We have audited the accompanying balance sheets of Virtual Machine Works,
Inc. (a Development Stage Enterprise) as of December 31, 1994 and 1995, and
the related statements of operations, stockholders' deficit, and cash flows
for the years then ended and for the period from October 6, 1993 (date of
inception) to December 31, 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 financial statements referred to above present fairly,
in all material respects, the financial position of Virtual Machine Works,
Inc. (a Development Stage Enterprise) as of December 31, 1994 and 1995, and
the results of its operations and its cash flows for the years then ended and
for the period from October 6, 1993 (date of inception) to December 31, 1995
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 12, 1996, except for Note 10, as to which the date is May 23, 1996
F-16
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 487,772 $ 46,752 $ 1,140,423
Research contract:
Billed................................ 43,323 342,324 325,003
Unbilled.............................. 56,332 113,473 37,785
Receivable from lender.................. -- 420,000 --
Prepaid expenses and other assets....... 1,749 6,962 31,841
--------- ----------- -----------
Total current assets................ 589,176 929,511 1,535,052
Property and equipment..................
Machinery and equipment............... 136,934 232,275 250,536
Furniture and fixture................. 11,954 15,920 24,060
Purchase software..................... 7,563 10,799 10,798
--------- ----------- -----------
156,451 258,994 285,394
Less allowances for depreciation and
amortization........................ (30,019) (109,271) (132,631)
--------- ----------- -----------
Property and equipment, net........ 126,432 149,723 152,763
--------- ----------- -----------
Total assets...................... $ 715,608 $ 1,079,234 $ 1,687,815
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................ $ 24,852 $ 174,844 $ 176,130
Accrued payroll and related expenses.... 19,610 47,697 56,001
Accrued expenses........................ -- 46,425 43,919
Convertible demand note................. -- 420,000 497,884
--------- ----------- -----------
Total current liabilities........... 44,462 688,966 773,934
Notes payable........................... -- -- 1,250,000
Other noncurrent liabilities............ -- 4,304 3,591
Mandatorily redeemable preferred stock:
Redeemable preferred stock, Series A
($.001 par value); authorized, issued
and outstanding 600,000 shares in 1994,
1995 and 1996.......................... 647,180 695,180 707,180
Redeemable preferred stock, Series B
($.001 par value);
authorized 1,052,632 shares, issued and
outstanding 421,053 shares in 1994 and
1,052,632 shares in 1995 and 1996 ..... 825,095 2,173,170 2,212,644
Commitments (Note 7)
Stockholders' deficit:
Common stock, ($.001 par value);
authorized 4,200,000 shares, issued and
outstanding 786,964 shares in 1994 and
862,464 shares (after deduction of
reacquired shares at cost) in 1995 and
1996 .................................. 787 862 862
Deficit accumulated during the
development stage...................... (801,916) (2,483,248) (3,260,396)
--------- ----------- -----------
Total stockholders' deficit......... (801,129) (2,482,386) (3,259,534)
--------- ----------- -----------
Total liabilities and
stockholders' deficit............ $ 715,608 $ 1,079,234 $ 1,687,815
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 6, 1993 OCTOBER 6, 1993
FOR THE YEARS ENDED (DATE OF SIX MONTHS ENDED (DATE OF
DECEMBER 31, INCEPTION) MARCH 31, INCEPTION)
---------------------- TO DECEMBER 31, ---------------------- TO MARCH 31,
1994 1995 1995 1995 1996 1996
--------- ----------- --------------- --------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development.......... $ 517,432 $ 668,570 $ 1,186,002 $ 152,279 $ 572,570 $ 1,758,572
Sales and marketing... 66,967 289,249 356,216 95,085 181,177 537,393
General and
administration....... 121,070 557,273 719,358 224,973 435,544 1,154,902
--------- ----------- ----------- --------- ----------- -----------
Loss from
operations......... (705,469) (1,515,092) (2,261,576) (472,337) (1,189,291) (3,450,867)
Interest income......... 16,577 22,360 38,937 11,464 10,271 49,208
--------- ----------- ----------- --------- ----------- -----------
Net loss................ (688,892) (1,492,732) (2,222,639) (460,873) (1,179,020) (3,401,659)
Accretion on preferred
stock.................. 71,293 188,600 260,609 69,630 102,948 363,557
--------- ----------- ----------- --------- ----------- -----------
Net loss applicable to
common stockholders.... $(760,185) $(1,681,332) $(2,483,248) $(530,503) $(1,281,968) $(3,765,216)
========= =========== =========== ========= =========== ===========
Net loss per share
applicable to common
stockholders........... $ (0.81) $ (2.08) $ (0.58) $ (1.49)
========= =========== ========= ===========
Common and common
equivalent shares used
in computing per share
amounts................ 937,865 806,468 907,079 862,464
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
December 1, 1993:
Issuance of common
stock at $.001 per
share................ 933,564 $ 934 $ -- $ -- $ 934
December 22, 1993:
Reverse stock split on
existing shares...... (83,564) (84) 84 -- --
Issuance of common
stock for patent
license.............. 118,651 119 -- -- 119
Accrued dividends on
redeemable preferred
stock.................. -- -- (84) (716) (800)
Net loss................ -- -- -- (41,015) (41,015)
-------- ----- ------- ----------- -----------
Balance at December 31,
1993................... 968,651 969 -- (41,731) (40,762)
October 31, 1994:
Forfeitures of common
stock................ (181,687) (182) 182 -- --
Accrued dividends on
redeemable preferred
stock.................. (182) (71,293) (71,475)
Net loss................ -- -- -- (688,892) (688,892)
-------- ----- ------- ----------- -----------
Balance at December 31,
1994................... 786,964 787 -- (801,916) (801,129)
September 29, 1995
Issuance of common
stock upon exercise
of stock options..... 75,500 75 7,475 -- 7,550
Accrued dividends on
redeemable preferred
stock.................. (7,475) (188,600) (196,075)
Net loss................ -- -- -- (1,492,732) (1,492,732)
-------- ----- ------- ----------- -----------
Balance at December 31,
1995................... 862,464 862 -- (2,483,248) (2,482,386)
Accrued dividends on
redeemable preferred
stock (unaudited)...... -- -- -- (51,474) (51,474)
Net loss (unaudited).... -- -- -- (725,674) (725,674)
-------- ----- ------- ----------- -----------
Balance at March 31,
1996 (unaudited)....... 862,464 $ 862 $ -- $(3,260,396) $(3,259,534)
======== ===== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 6, 1993 SIX MONTHS ENDED OCTOBER 6, 1993
DECEMBER 31, (DATE OF INCEPTION) MARCH 31, (DATE OF INCEPTION)
---------------------- TO DECEMBER 31, ---------------------- TO MARCH 31,
1994 1995 1995 1995 1996 1996
--------- ----------- ------------------- --------- ----------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(688,892) $(1,492,732) $(2,222,639) $(460,874) $(1,179,020) $(2,948,313)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation......... 30,019 79,252 109,271 10,277 66,076 138,631
Non cash charge of
acquired technology. -- -- 119 -- -- 119
Changes in operating
assets and liabilities
Increase in research
contract--billed...... (43,323) (299,001) (342,324) (109,382) (215,621) (325,003)
Increase in research
contract--unbilled.... (56,332) (57,141) (113,473) (56,332) 18,547 (37,785)
Increase (decrease) in
prepaid expenses and
other current assets.. (1,749) (5,213) (6,962) 5,923 185,692 (31,841)
Increase in accounts
payable............... 8,840 149,992 174,844 22,485 79,052 176,130
Increase (decrease) in
payroll and related
expenses.............. 19,610 28,087 47,697 18,698 37,303 56,001
Increase (decrease) in
accrued expenses...... (40,519) 46,425 46,425 68,862 40,483 43,919
Increase (decrease) in
other non current
liabilities........... -- 4,304 4,304 -- (1,087) 3,591
--------- ----------- ----------- --------- ----------- -----------
Net cash used in
operating
activities........ (772,346) (1,546,027) (2,302,738) (500,343) (968,575) (2,930,551)
Investing activities:
Purchases of property
and equipment......... (140,816) (102,543) (258,994) (93,462) (6,847) (285,394)
--------- ----------- ----------- --------- ----------- -----------
Net cash used in
investment activi-
ties.............. (140,816) (102,543) (258,994) (93,462) (6,847) (285,394)
Financing activities:
Proceeds from debt
issuance.............. -- -- -- -- 1,250,000 1,250,000
Proceeds from demand
note issuance......... -- -- -- -- 497,884 497,884
Issuance of redeemable
preferred stock....... 900,000 1,200,000 2,600,000 832,101 -- 2,600,000
Issuance (repurchase)
of common stock....... -- 7,550 8,484 (182) 26 8,484
--------- ----------- ----------- --------- ----------- -----------
Net cash provided
by financing
activities........ 900,000 1,207,550 2,608,484 831,919 1,747,910 4,356,368
--------- ----------- ----------- --------- ----------- -----------
Increase (decrease) in
cash and cash
equivalents............ (13,162) (441,020) 46,752 238,114 772,488 1,140,423
Cash and cash
equivalents at
beginning of period.... 500,934 487,772 -- 728,352 367,935 --
--------- ----------- ----------- --------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 487,772 $ 46,752 $ 46,752 $ 966,466 $ 1,140,423 1,140,423
========= =========== =========== ========= =========== ===========
Supplemental disclosures
of noncash
transactions:
Issuance of common
stock for acquired
technology............ $ -- $ -- $ 119 $ -- $ -- $ 119
Receivable for
convertible demand
note.................. $ -- $ 420,000 $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
1. NATURE OF BUSINESS:
Virtual Machine Works, Inc. (the "Company") was incorporated in Delaware on
October 6, 1993. The Company was founded to develop and market advanced, low
cost, easy to use logic emulation systems to the EDA industry. Logic emulation
is the practice of using reprogrammable hardware as a physical prototype of
custom and semi-custom integrated circuits prior to their silicon fabrication.
VirtualWires, the Company's core technology, originated at the Massachusetts
Institute of Technology, and has been made available to the Company under a
long-term exclusive license (Note 8).
Since inception, the Company has devoted substantially all of its efforts to
research and development, raising capital, developing products, and recruiting
new employees. Accordingly, the Company is considered a development stage
enterprise as defined in Statement of Financial Accounting Standards No. 7 and
the accompanying financial statements represent those of a development stage
enterprise.
For the period from inception (October 6, 1993) through December 31, 1995
and for the six months ended March 31, 1996, the Company has incurred losses
from operations. The Company anticipates that it will require additional
financing to fund the completion of its products. Management's plan in
continuing their operations include raising additional funds from new
investors, generating revenues from product sales and utilizing funding from
the federal government (see Note 3). There can be no assurance that the
Company will obtain additional financing or product revenue necessary to
continue operations. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. (See also Note 10 for
subsequent event discussing the acquisition of the Company).
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
ORGANIZATIONAL COSTS
All start-up costs of the Company are charged to expense as incurred due to
risk of recoverability.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less from purchase date to be cash equivalents include shares in a
money market mutual fund at December 31, 1994 and 1995 and March 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Machinery and equipment........................ 3 years
Furniture and fixtures......................... 5 years
Purchased software............................. 3 years
</TABLE>
Upon retirement or sale, the cost of the assets disposed of and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in the determination of net income or loss.
F-21
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Recoverable costs
from government research and development reimbursement contracts are
recognized as the costs are incurred and offset directly against research and
development costs.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance is required
to offset any net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will
not be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reported period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash
equivalents, recoverable costs owed from research and development cost sharing
agreements, accounts payable and short-term debt approximate fair value as of
December 31, 1994 and 1995 and March 31, 1996 because of the relatively short
maturities of the instruments.
INTERIM FINANCIAL INFORMATION
The financial statements and related notes as of March 31, 1996 and for the
six months ended March 31, 1995 and 1996 are unaudited and have been prepared
on the same basis as the audited financial statements. The unaudited financial
statements 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 of operations for the
interim period.
The results of operations for the six months ended March 31, 1996 are not
necessarily indicative of results for the the full year.
NET LOSS PER COMMON SHARE
Net loss per common share is based upon the weighted average number of
common and common equivalent shares (when dilutive) outstanding each year.
Common equivalent shares result from the assumed exercise of outstanding stock
options, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method. Primary
and fully diluted earnings per share are equal for all periods presented.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of temporary cash investments in money
market mutual funds and recoverable costs owed from research and development
cost sharing arrangements.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which is effective for 1996. SFAS 123 established a
fair value based method of accounting for stock-based compensation plans. The
F-22
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
Company intends to adopt the disclosure only alternative under SFAS 123, and,
accordingly, the Company will be required to disclose the pro forma effect on
net income or loss in the notes to the financial statements using the fair
value method in 1996. The Company has not yet determined the impact of these
pro forma adjustments.
LONG-LIVED ASSETS
In 1995 the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets to be Disposed of." SFAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undisclosed cash flows attributable to such
assets. SFAS 121 is effective for fiscal years beginning after December 15,
1995. Adoption of SFAS 121 is not expected to have a material impact on the
Company's financial position or results of operations.
3. GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACT:
In 1994, the Company was awarded a cost-without-fee research and product
development contract from the federal government. Under the terms of the
contract the Company is to perform "best efforts" research and development
aimed at developing among other things; a low cost, easy to use logic
emulation system prototype using VirtualWires technology, algorithms and
software packages for VirtualWires systems, and software compilation
technology which will allow high level designs for rapid prototyping,
simulation and emulation.
The contract commenced in September 1994 and is expected to run
approximately 36 months (but not to exceed 10 years). Costs incurred by the
Company on the contract plus applicable overhead are billed monthly to the
federal government. The total contract upper limit is $3,846,387 ($2,008,712
authorized at December 31, 1995 and at March 31, 1996). Amounts included in
these financial statements relating to the contract are as follows:
<TABLE>
<CAPTION>
OCTOBER 6,
1993 (DATE
OF SIX
INCEPTION) MONTHS
DECEMBER 31, TO ENDED
------------------- DECEMBER 31, MARCH
1994 1995 1995 31, 1996
-------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Total costs billed and recovered..... $ 66,059 $ 948,458 $1,014,517 $423,698
Total costs billed but not yet
received............................ 43,323 342,324 342,324 325,004
Total costs incurred but not yet
billed.............................. 56,332 113,473 113,473 37,785
Total costs incurred under contract
and netted against research and
development expense................. $165,714 $1,404,255 $1,470,314 $786,487
</TABLE>
There is no allowance for uncollectible costs under the contract.
4. INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred income taxes were as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Gross deferred tax assets:
Net operating losses.................................... $ 256,000 $ 788,000
Research and development credits........................ 34,000 94,000
Start-up costs.......................................... 26,000 79,000
Other................................................... 11,000 20,000
--------- ---------
Total................................................. 327,000 981,000
Valuation allowance..................................... (327,000) (981,000)
--------- ---------
Net deferred tax asset.................................. $ -- $ --
========= =========
</TABLE>
F-23
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets, and has determined
that based on the weight of the available evidence, it is more likely than not
that all of the deferred tax assets will not be realized, accordingly, the
deferred tax assets have been fully reserved. If the Company achieves
profitability, the net deferred tax asset would be available to offset future
income tax expense.
At December 31, 1994 and 1995, the Company had net operating loss
carryforwards of approximately $640,000 and $1,970,000, respectively, which
begin to expire in the year 2008.
At December 31, 1994 and 1995, the Company also had approximately $34,000
and $94,000, respectively, of research and experimentation credit
carryforwards (which begin to expire in 2008) for tax purposes that are
available to offset federal income taxes.
5. STOCKHOLDERS' DEFICIT AND MANDATORILY REDEEMABLE PREFERRED STOCK:
COMMON STOCK
Common Stock has full voting rights. Dividend and liquidation rights of
common stock are subordinated to those of all series of preferred stock.
On December 1, 1993, the founders of the Company purchased 933,564 shares of
common stock (the "Founders' Shares") at par value. Twenty percent of the
Founders' Shares immediately vested upon issuance. Thereafter, the shares
continue to vest ratably at the rate of 5% per quarter. On December 23, 1993
the Company effectuated a reverse stock split resulting in the reduction in
the number of shares of Founders' Shares from 933,564 to 850,000 shares.
Subsequently, on that same day, the Company issued 118,651 shares of common
stock to the Massachusetts Institute of Technology in accordance with the
Patent License agreement dated December 22, 1993 (Note 8).
On October 1, 1994, the Company and one of the founders entered into a
severance agreement. Under the terms of the employment agreement, the
founders' vesting schedule for his portion of the Founders' Shares (403,750)
automatically accelerate such that he will be treated as if his employment
terminated on November 1, 1995. As a result, the founder became vested in
222,063 shares of common stock. The remaining unvested stock was forfeited.
The forfeited common shares of 181,687 for financial reporting purposes are
treated as treasury stock.
MANDATORILY REDEEMABLE PREFERRED STOCK
The Company has authorized two series of $.001 par value preferred stock as
of December 31, 1995 and March 31, 1996; 600,000 shares of Series A redeemable
preferred stock and 1,052,632 shares of Series B redeemable preferred stock.
As of December 31, 1995 and March 31, 1996, 600,000 shares of Series A
redeemable preferred stock and 1,052,632 shares of Series B redeemable
preferred stock were outstanding.
DIVIDENDS
The holders of the Series A and Series B redeemable preferred stock are
entitled to receive cumulative dividends out of legally available assets of
the Company, as declared by the Board of Directors prior, and in preference
to, payment of dividends to common stockholders. Dividends accrue at $.08 and
$.15 per share, per annum, on Series A and Series B redeemable preferred
stock, respectively.
F-24
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
VOTING RIGHTS
Series A and Series B redeemable preferred stockholders are entitled to
voting rights equivalent to those of common stockholders on most matters voted
on by holders of common stock. Certain exceptions include the election of
directors, where under different scenarios, different classes of stock are
individually responsible for electing individual directors.
LIQUIDATION
In the event of liquidation of the Company and before any distribution to
common stockholders, the Series A and B preferred stockholders are entitled to
receive an amount per share equal to the original issue price ($1.00 for
Series A and $1.90 for Series B), plus all accrued but unpaid dividends. At
December 31, 1995, the aggregate liquidation preference for both classes of
redeemable preferred stock was $2,868,350 ($2,919,824 at March 31, 1996).
Upon the merger or consolidation of the Company, or any sale or transfer of
substantially all the assets of the Company, the preferred stockholders may
elect to receive their liquidation preference immediately prior to the
transaction or, share equally in the treatment received by common stockholders
as if the preferred shares were converted at their applicable conversion
price.
REDEMPTION
The Company is required to redeem Series A and Series B redeemable preferred
stock at a price per share equal to the original issue price ($1.00 for Series
A and $1.90 for Series B), plus all accrued but unpaid dividends.
Redemption is at the option of the stockholder, however, the Company is not
required to redeem prior to 60 days after the first quarterly accounting
period in which the Company has minimum net worth in excess of $10,000,000 and
working capital in excess of $6,000,000. Additionally, the Company is not
required to redeem prior to the sixth anniversary of the preferred stock issue
date and redemption may be declined by the Company to the extent that there
are insufficient legally available funds for the purchase.
The maximum number of shares which the Company will be required to redeem in
any year shall equal (A) the total number of Series A and Series B redeemable
preferred stock shares issued by the Company (whether or not then outstanding)
multiplied by the Purchase Percentage set forth below, less (B) the number of
redeemable preferred shares previously redeemend by the Company:
<TABLE>
<CAPTION>
YEAR PURCHASE PERCENTAGE
---- -------------------
<S> <C>
Year in which redemption is requested................. 34%
First following year.................................. 67%
Second following year................................. 100%
</TABLE>
CONVERSION
Each share of Series A redeemable and Series B redeemable preferred stock is
convertible into one share of common stock, adjustable for certain dilutive
events. Conversion is at the option of the holder, but becomes automatic upon
the closing of an initial public offering in which not less than $10,000,000
of gross proceeds shall be received by the Company, at a price per share of at
least 300% of the applicable conversion price in
F-25
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
effect for such preferred share immediately prior to the public distribution.
Applicable conversion price at December 31, 1995 and March 31, 1996 is $1.00
and $1.90 for Series A and B redeemable preferred stock, respectively. At
December 31, 1995 and March 31, 1996, 1,652,632 shares of common stock were
reserved for conversion.
PREEMPTIVE RIGHTS
Until the occurrence of certain events, holders of Series A and Series B
redeemable preferred stock have the preemptive right of subscription on a pro
rata basis, to all shares of additional preferred stock. Additionally, until
the occurrence of certain events, the holders of common stock, Series A and
Series B redeemable preferred stock have the preemptive right of subscription
to all additional shares of common stock.
1994 STOCK OPTION PLAN
The Company has adopted the 1994 Stock Option Plan (the "Plan") for
directors, officers, employees and consultants of the Company. The Plan, which
is administered by the Board of Directors, permits the Company to grant
options for the purchase of common stock, up to a maximum of 1,000,000 shares.
The Company has reserved 1,000,000 shares of common stock for issuance under
the Plan.
The Plan provides for the granting of Incentive Stock Options (ISOs) and
nonqualified stock options. The ISOs exercise price may not be less than 100%
(110% in certain cases) of the fair market value of the common stock, as
determined by the Board of Directors, on the date of the grant. The options
granted vest over a period determined by the Board of Directors upon issuance
and expire not more than ten years (five years in certain cases) from the date
of grant.
Nonqualified options grant recipients the right to purchase a specified
number of common stock shares at a purchase price of at least $.001 (par
value), as determined by the Board of Directors. The options become
exercisable over a period determined by the Board of Directors and in most
cases expire ten years from the date of grant, however, no expiration date is
required under the Plan.
In 1995, the Company granted nonqualified options to consultants for the
purchase of 50,000 shares of common stock at an exercise price of $0.30 per
share. The options were granted under similar terms as incentive stock options
from the same period and the Company has not recorded any charge for such
grants as their effect on the computation of net loss in these financial
statements is not material.
Information with respect to the options granted, exercised, and canceled is
set forth below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- MARCH 31,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Shares under option at beginning of peri-
od....................................... -- 430,500 705,500
Options granted........................... 460,500 387,000 67,000
Options exercised......................... -- (75,500) --
Options canceled.......................... (30,000) (1,500) (62,500)
-------- ---------- -------
Shares under option at the end of period.. 430,500 740,500 710,000
======== ========== =======
Options exercisable at end of period...... 83,906 163,721 205,895
Price per share of options granted and ex-
ercised.................................. $0.10 $0.10-0.30 $0.30
</TABLE>
F-26
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
During 1995, 75,500 options were exercised at an option price of $0.10 per
share. During the period ended December 31, 1993, no options were granted.
A portion of the options exercised during 1995 were for common stock which
is subject to restriction. This restriction provides that the common stock may
be repurchased by the Company (at the option price paid by the employee), if
the conditions under which the options would have become exercisable cease to
exist. At December 31, 1995, 75,000 of these shares were subject to repurchase
by the Company (56,250 shares were subject to repurchase at March 31, 1996).
6. CONVERTIBLE DEMAND NOTE:
In December 1995, the Company entered into a Convertible Demand Note
Agreement (the "Note") with a face value of $420,000. The Note is payable upon
written demand of the holder and bears interest at 9% per annum. Upon the
occurrence of certain events, the Note may be converted into convertible
securities (i.e. convertible preferred stock) at the option of the holder.
Additionally, in connection with the Note, the holder received a warrant to
purchase common stock. The holder is entitled to warrant shares equal to 10%
of the principal amount of the Note divided by the eventual exercise price,
plus an additional 10% of the principal amount of the Note for each full month
the Note remains outstanding divided by the eventual exercise price. The
exercise price for warrant shares is set upon exercise at the most recent
price offered for similar shares, or, if after June 30, 1996 at $1.90 per
share (either is defined as the "Purchase Price"). In lieu of exercising the
warrants for cash, the holder may elect to receive a number of shares equal to
the value of the warrants as calculated based on the appreciation in fair
value over the Purchase Price at the date of such exercise. The warrant
terminates on December 31, 2005 or, if earlier, immediately prior to: the
closing of an initial public offering of the Company's common stock which
meets certain criteria, the closing of the sale of all or substantially all of
the Company's assets, or upon the acquisition of the Company by merger. The
Company has not recorded a charge for this warrant as the effect of this
warrant on the computation of net loss in these financial statements is not
material.
In February 1996, the Company entered into an additional Convertible Demand
Note Agreement under the same terms as the first Note with a face value of
$77,884.
All amounts outstanding at March 31, 1996 were repaid in connection with the
sale of the Company (see Note 10).
7. COMMITMENTS:
On July 24, 1995, the Company entered into a lease to rent space for its
primary office and development facilities which commenced on August 1, 1995
and expires on July 31, 1998. In February 1996, the Company also entered into
a lease to rent space for one of its sales offices which commenced on March 1,
1996 and expires on February 28, 1998. Under these agreements, minimum lease
commitments are approximately as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
- -----------------------
<S> <C>
1996.................... $116,236
1997.................... 126,324
1998.................... 73,689
--------
$316,249
========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
- --------------------
<S> <C>
1996 (remaining nine
months)................ $116,711
1997.................... 155,124
1998.................... 78,489
--------
$350,324
========
</TABLE>
Rent expense was approximately $34,000, $88,000, $123,000 , $31,477 and
$64,000 for the years ended December 31, 1994 and 1995, for the period from
October 6, 1993 (date of inception) to December 31, 1995 and for the six
months ended March 31, 1995 and 1996, respectively.
F-27
<PAGE>
VIRTUAL MACHINE WORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND 1996 IS UNAUDITED)
8. PATENT LICENSE AGREEMENT:
On December 22, 1993, the Company entered into an agreement with the
Massachusetts Institute of Technology ("MIT") where MIT granted a license for
the use of its VirtualWires technology to the Company for commercial product
development. In consideration for the license, the Company agreed to: pay MIT
running royalties at 1.5% of net sales from the eventual licensed products,
pay MIT running royalties at 50% of any sublicense fees received by the
Company for the eventual licensed products and processes, and issue 118,651
shares of common stock in the Company to MIT. In addition, among other things,
the Company agreed to the following minimum net sales milestones as a covenant
to the agreement. If the Company fails to meet these milestones, MIT has the
right to terminate the license agreement with 90 days notice.
<TABLE>
<S> <C>
1995................................................................ $125,000
1996................................................................ 250,000
1997 and each year thereafter....................................... 500,000
</TABLE>
For the year ended December 31, 1995, the Company failed to meet the
established milestone. The Company has received a waiver from MIT and paid MIT
1.5% of the established minimum milestone. Through March 31, 1996, the Company
has not achieved the 1996 milestone. Should the Company not meet future
milestones, the Company will need to obtain future waivers which are subject
to MIT's approval.
9. EMPLOYEE BENEFIT PLAN:
The Company has adopted a salary deferral plan (the "Plan") covering
substantially all of its employees. The Company has made no contributions to
the Plan as of December 31, 1995 or March 31, 1996.
10. SUBSEQUENT EVENT:
As of May 23, 1996, the Company was acquired by IKOS Systems, Inc. (IKOS), a
developer, manufacturer and marketer of high-performance hardware-assisted
systems for simulation of integrated circuits (IC) and IC-based electronic
systems. Under the terms of the purchase agreement, the stockholders of the
Company will receive approximately $10.0 million in cash and approximately
$5.0 million in IKOS common stock and options. Prior to March 31, 1996 and in
connection with the acquisition, the Company was advanced $1,250,000 in
exchange for a note. At March 31, 1996, the note is included in long-term debt
in the accompanying financial statements.
F-28
<PAGE>
IKOS SYSTEMS, INC. AND VIRTUAL MACHINE WORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
In May 1996, IKOS Systems, Inc. (IKOS) completed the acquisition of Virtual
Machine Works, Inc. (VMW), a development stage company. The acquired company
is currently developing logic emulation systems. Under the purchase agreement,
the Company will pay approximately $10.0 million in cash and issue
approximately 113,000 shares in stock to the VMW Stockholders, options to
purchase VMW stock will be converted in options to purchase approximately
84,000 shares of IKOS Common Stock, and the Company will pay acquisition costs
of approximately $500,000. In March 1996 the Company advanced VMW
approximately $1,250,000 in exchange for a note. The purchase price allocation
is based on a preliminary appraisal received by IKOS, and will be finalized
upon closing to reflect the final balance sheet of VMW.
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition of Virtual Machine Works, Inc. under the
purchase method of accounting at the date and for the period shown. Under the
purchase method of accounting, the amount relating to acquired in-process
research and development will be charged to operations as of the purchase
date. The Company presently expects to record a charge of approximately $9.6
million relating to the acquisition of in-process technology in the quarter
ending June 29, 1996.
The pro forma condensed combined balance sheet assumes the acquisition
occurred as of March 31, 1996 (the date of the balance sheet) and presents the
combined financial position of IKOS and VMW. Such unaudited pro forma
information is based on the historical balance sheets for IKOS and VMW and
gives effect for the pro forma adjustments described in the notes accompanying
the pro forma condensed combined financial statements. The charge relating to
the acquisition of in-process technology described above is included in the
pro forma condensed combined balance sheet as a charge to retained earnings.
The pro forma condensed combined statements of operations assume the
acquisition took place on October 2, 1994 and October 1, 1995 and present the
combined operating results of IKOS and VMW. Such unaudited pro forma
information is based on the historical statements of operations for IKOS and
VMW and give effect for the pro forma adjustments described in the notes
accompanying the pro forma condensed combined financial statements. The charge
relating to the acquisition of in-process technology described above is
excluded from the pro forma statements of operations as it represents a
nonrecurring item directly related to the transaction. The pro forma condensed
combined statement of operations for the year ended September 30, 1995
combines the historical statement of operations information for IKOS for the
fiscal year ended September 30, 1995 with the historical statement of
operations for VMW for the fiscal year ended December 31, 1995. The pro forma
condensed combined statement of operations for the six months ended March 30,
1996 combines the historical statement of operations information for IKOS for
the six months ended March 30, 1996 with the historical statement of
operations for VMW for the six months ended March 31, 1996. For presentation
of comparative operating periods, the results of operations of VMW for the
three months ended December 31, 1995 has been included in both the annual and
the six month interim period. The net loss for VMW for the three months ended
December 31, 1995 was approximately $453,000.
These pro forma statements may not be indicative of the results that
actually would have occurred if the combination had been in effect on the
dates indicated or which may be realized in the future.
F-29
<PAGE>
IKOS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
VIRTUAL MACHINE
IKOS SYSTEMS, INC. WORKS, INC.
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
MARCH 30, 1996 MARCH 31, 1996 ADJUSTMENTS MARCH 30, 1996
------------------ --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets.......... $29,040 $ 1,535 $(10,500)(B) $20,075
Property and equipment.. 2,339 153 2,492
Other assets............ 1,455 -- 430 (C) 5,947
5,312 (C)
(1,250)(J)
------- ------- -------- -------
$32,834 $ 1,688 $ (6,008) $28,514
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities..... $ 9,196 $ 774 $ (498)(A) $ 9,472
Long term debt.......... 800 1,250 (1,250)(J) 800
Other liabilities....... 248 4 252
Mandatory redeemable
preferred stock........ -- 2,920 (2,920)(A) --
Commitments
Stockholders' equity:
Common stock and paid-
in capital........... 38,188 1 (1)(G) 43,188
5,000 (B)
Accumulated deficit... (15,598) (3,261) 3,261 (G) (25,198)
(9,600)(C)(H)
------- ------- -------- -------
Total stockholders'
equity (net capital
deficiency)........ 22,590 (3,260) (1,340) 17,990
------- ------- -------- -------
$32,834 $ 1,688 $ (6,008) $28,514
======= ======= ======== =======
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-30
<PAGE>
IKOS SYSTEMS, INC.
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------
VIRTUAL MACHINE
IKOS SYSTEMS, INC. WORKS, INC.
------------------ ---------------
PRO FORMA
SIX MONTHS ENDED SIX MONTHS
---------------------------------- PRO FORMA ENDED
MARCH 30, 1996 MARCH 31, 1996 ADJUSTMENTS MARCH 30, 1996
------------------ --------------- ----------- --------------
<S> <C> <C> <C> <C>
Net revenues............ $20,431 $ -- $ -- $20,431
Cost of revenues........ 4,533 -- -- 4,533
------- ------- ----- -------
Gross margin............ 15,898 -- -- 15,898
Operating expenses:
Research and
development.......... 3,268 573 -- 3,841
Sales and marketing... 6,911 181 -- 7,092
General and
administration....... 1,723 435 -- 2,158
Amortization of
acquired intangibles. -- -- 603 (D) 603
------- ------- ----- -------
Total operating
expenses........... 11,902 1,189 603 13,694
------- ------- ----- -------
Income (loss) from
operations............. 3,996 (1,189) (603) 2,204
Other income (expense).. 499 10 (294)(F) 215
------- ------- ----- -------
Income (loss) before
income taxes........... 4,495 (1,179) (897) 2,419
Provision (benefit) for
income taxes........... 710 -- (103)(I) 607
------- ------- ----- -------
Net income (loss)....... $ 3,785 $(1,179) $(794) $ 1,812
======= ======= ===== =======
Net income (loss) per
share................ $0.49 $ (1.37) $ 0.23
======= ======= =======
Shares used in computing
net income (loss)
per share.............. 7,681 862 7,878(K)
======= ======= =======
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-31
<PAGE>
IKOS SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
VIRTUAL MACHINE
IKOS SYSTEMS, INC. WORKS, INC.
------------------ -----------------
YEARS ENDED PRO FORMA
------------------------------------ PRO FORMA YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1995 ADJUSTMENTS SEPTEMBER 30, 1995
------------------ ----------------- ----------- ------------------
<S> <C> <C> <C> <C>
Net revenues............ $28,600 $ -- $ -- $28,600
Cost of revenues........ 7,139 -- -- 7,139
------- ------- ------- -------
Gross margin............ 21,461 -- -- 21,461
Operating expenses:
Research and
development.......... 3,999 669 -- 4,668
Sales and marketing... 11,763 289 -- 12,052
General and
administration....... 2,301 557 -- 2,858
Charge for acquired
in-process
technology........... -- -- -- --
Amortization of
goodwill............. -- -- 1,205 (D) 1,205
------- ------- ------- -------
Total operating
expenses........... 18,063 1,515 1,205 20,783
------- ------- ------- -------
Income (loss) from
operations............. 3,398 (1,515) (1,205) 678
Other income (expense).. 169 22 (1,058)(E) (867)
------- ------- ------- -------
Income (loss) before
income taxes........... 3,567 (1,493) (2,263) (189)
Provision (benefit) for
income taxes........... 411 -- (102)(I) 309
------- ------- ------- -------
Net income (loss)....... $ 3,156 $(1,493) $(2,161) $ (498)
======= ======= ======= =======
Net income (loss) per
share................ $ 0.51 $ (1.85) $ (0.09)
======= ======= =======
Shares used in computing
net income (loss) per
share.................. 6,151 806 5,724 (K)
======= ======= =======
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-32
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The pro forma information presented is theoretical in nature and not
necessarily indicative of the future consolidated results of operations of the
Company or the consolidated results of operations which would have resulted
had the Company purchased Virtual Machine Works, Inc. (VMW) during the periods
presented. The pro forma condensed consolidated financial statements reflect
the effects of the acquisition, assuming the acquisition and related events
occurred as of March 30, 1996 for the purposes of the pro forma condensed
combined balance sheet and as of October 2, 1994 and October 1, 1995 for the
purposes of the pro forma condensed combined statements of operations.
2. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT ADJUSTMENTS:
(A) To eliminate bridge financing from redeemable preferred stockholders
and investors who were repaid with cash tendered by IKOS.
(B) The purchase price for the completion of the VMW acquisition was
determined as follows (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $10,000
IKOS common stock and stock options............................... 5,000
Estimated transaction costs, including financing warrants......... 500
-------
Consideration to stockholders and optionholders of VMW............ 15,500
Previously advanced funds to VMW.................................. 1,250
-------
$16,750
=======
</TABLE>
(C) Allocation of the purchase price for the completion of the VMW
acquisition was determined as follows (in thousands):
<TABLE>
<S> <C>
Current assets at March 31, 1996................................. $ 1,535
Property and equipment at March 31, 1996......................... 153
Acquired workforce intangible.................................... 430
Goodwill......................................................... 5,312
Assumption of VMW current and other liabilities at March 31,
1996............................................................ (280)
Acquired in-process technology................................... 9,600
-------
$16,750
=======
</TABLE>
(D) Amortization of the acquired workforce and excess purchase price
(goodwill) will be over the estimated useful lives of three years and
five years, respectively.
(E) Adjustment to interest expense to reflect the increased debt that would
have been required had the transaction occurred on October 2, 1994.
(F) To reduce interest income earned on the cash payment and cash advance
to VMW of $11,750,000 for the purchase price and related acquisition
costs.
(G) Elimination of VMW stockholders' equity amounts.
F-33
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(H) The pro forma statement of operations exclude the charge of $9.6
million for purchased in-process research and development which arose
from the acquisition. These charges will be included in the Company's
consolidated financial statements for the year ending September 28,
1996.
The purchase price was allocated to the tangible and intangible assets
of VMW based on the fair market values of those assets using a risk
adjusted discounted cash flows approach. The evaluation of the
underlying technology and patent rights acquired considered the
inherent difficulties and uncertainties in completing the development,
and thereby achieving technological feasibility, and the risks related
to the viability of and potential changes in future target markets. The
underlying technology and patent rights had no alternative use (in
other research and development projects or otherwise) since the
technology was acquired for the sole purpose of developing emulation
products.
(I) The pro forma provision for income taxes represents the hypothetical
amount that would have resulted had the Company and VMW filed
consolidated income tax returns during the period presented. The
Company will not receive any tax benefits for either the amounts
expensed as in-process research and development costs or the expenses
related to the amortization of acquired intangible assets.
(J) To eliminate advance made by the Company to VMW prior to March 30,
1996.
(K) Shares used in net income (loss) per share computation have been
adjusted to reflect the issuance of approximately 112,946 shares of
IKOS common stock and options to purchase VMW stock will be converted
in options to purchase approximately 84,000 shares of IKOS common stock
as if the transaction had occurred on October 2, 1994 or October 1,
1995. Common equivalent shares are excluded from the computation of net
loss per share as their effect is antidilutive.
F-34
<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 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>
Available Information...................................................... 2
Information Incorporated by Reference...................................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 5
Use of Proceeds............................................................ 11
Price Range of Common Stock................................................ 11
Dividend Policy............................................................ 11
Capitalization............................................................. 12
Selected Consolidated Financial Data....................................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 14
Business................................................................... 21
Management................................................................. 30
Selling Stockholders....................................................... 32
Underwriting............................................................... 33
Legal Matters.............................................................. 34
Experts.................................................................... 34
Index to Financial Statements.............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,122,078 Shares
[LOGO OF IKOS SYSTEMS]
Common Stock
-------------
PROSPECTUS
-------------
Needham & Company, Inc.
SoundView Financial Group, Inc.
Unterberg Harris
---------------
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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........... $ 11,708
NASD filing fee............................................... 3,895
Nasdaq National Market additional shares listing application
fee........................................................... 17,500
Accounting fees and expenses.................................. 90,000
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........................................ 31,897
--------
TOTAL....................................................... $350,000
========
</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 May 22, 1996).
2.1 Agreement and Plan of Reorganization among the Company, VMW
Acquisition Corporation and VMW dated May 14, 1996, excluding
certain of the following exhibits thereto:
Exhibit A Certificate of Merger of VMW Acquisition Corporation
with and into VMW**
Exhibit B Merger Consideration Schedule*
Exhibit C Irrevocable Proxy**
Exhibit D Noncompete and Nonsolicitation Agreement**
Exhibit E Registration Rights Agreement (included as Exhibit 4.1
hereto)
Exhibit F Investor Representation Letter**
Exhibit G Indemnity Escrow Agreement**
4.1 Form of Registration Rights Agreement by and among the Company
and certain former VMW Stockholders.
5.1 Legal opinion of Gray Cary Ware & Freidenrich, A Professional
Corporation, counsel to the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors (included as
page II-6).
23.2 Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1
hereto).
23.3 Consent of Coopers & Lybrand L.L.P. (included as page II-7).
24.1 Power of Attorney (included as page II-5).
</TABLE>
- --------
*Included herewith.
**To be provided to the Commission upon request.
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-2
<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-3
<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-3 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 23RD DAY OF
MAY, 1996.
IKOS SYSTEMS, INC.
/s/ Ramon A. Nunez
By: __________________________________
Ramon A. Nunez
President and Chief Executive
Officer
II-4
<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-3 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 MAY 23, 1996 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED.
SIGNATURES TITLE DATE
/s/ Gerald S. Casilli Chairman of the May 23, 1996
- ------------------------------------- Board
GERALD S. CASILLI
/s/ Ramon A. Nunez President, Chief May 23, 1996
- ------------------------------------- Executive Officer
RAMON A. NUNEZ
/s/ Joseph W. Rockom Vice President of May 23, 1996
- ------------------------------------- Finance and
JOSEPH W. ROCKOM Administration,
Chief Financial
Officer and
Secretary
/s/ James R. Oyler Director May 23, 1996
- -------------------------------------
JAMES R. OYLER
/s/ Lutz P. Henckels Director May 23, 1996
- -------------------------------------
LUTZ P. HENCKELS
/s/ Glenn E. Penisten Director May 23, 1996
- -------------------------------------
GLENN E. PENISTEN
II-5
<PAGE>
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 the use of our report dated
October 17, 1995 in the Registration Statement (Form S-3) and related
Prospectus of IKOS Systems, Inc. for the registration of 1,290,390 shares of
its common stock.
We also consent to the incorporation by reference therein of our report
dated October 17, 1995 with respect to the financial statements and schedule
of IKOS Systems, Inc. for each of the three years in the period ended
September 30, 1995 included in the Annual Report (Form 10-K) for fiscal 1995
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Jose, California
May 23, 1996
II-6
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement under the
Securities Act of 1933 on Form S-3 (File No. 333- ) in Part I of the
Registration Statement of our report, which includes an explanatory paragraph
that there is substantial doubt about the entity's ability to continue as a
going concern, dated April 12, 1996, except for Note 10 as to which the date
is May 23, 1996, on our audits of the financial statements of Virtual Machine
Works, Inc. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 23, 1996
II-7
<PAGE>
SCHEDULE II
IKOS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 2, 1993......... $122 $ -- $ -- $122
Year ended October 1, 1994......... $122 $ -- $ -- $122
Year ended September 30, 1995...... $122 $ 49 $ -- $171
Six months ended March 30, 1996.... $171 $ 50 $ -- $221
Warranty reserve:
Year ended October 2, 1993......... $ 60 $ 34 $ -- $ 94
Year ended October 1, 1994......... $ 94 $ (18) $ -- $ 76
Year ended September 30, 1995...... $ 76 $ 34 $ -- $ 94
Six months ended March 30, 1996.... $ 94 $ 98 $ -- $192
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE PAGE NO.
------- ------------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement (draft dated May 22, 1996).
2.1 Agreement and Plan of Reorganization among the Company, VMW
Acquisition Corporation and VMW dated May 14, 1996,
excluding certain of the following exhibits thereto:
Exhibit A Certificate of Merger of VMW Acquisition
Corporation with and into VMW**
Exhibit B Merger Consideration Schedule*
Exhibit C Irrevocable Proxy**
Exhibit D Noncompete and Nonsolicitation Agreement**
Exhibit E Registration Rights Agreement (included as
Exhibit 4.1 hereto)
Exhibit F Investor Representation Letter**
Exhibit G Indemnity Escrow Agreement**
4.1 Form of Registration Rights Agreement by and among the
Company and certain former VMW Stockholders.
5.1 Legal opinion of Gray Cary Ware & Freidenrich, A
Professional Corporation, counsel to the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors
(included as page II-6).
23.2 Consent of Gray Cary Ware & Freidenrich (included in
Exhibit 5.1 hereto).
23.3 Consent of Coopers & Lybrand L.L.P. (included as page II-
7).
24.1 Power of Attorney (included as page II-5).
</TABLE>
- --------
*Included herewith.
**To be provided to the Commission upon request.
<PAGE>
Draft of 5/22/96
1,122,078 Shares/*/
IKOS SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1996
NEEDHAM & COMPANY, INC.
SOUNDVIEW FINANCIAL GROUP, INC.
UNTERBERG HARRIS
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
IKOS Systems, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell 1,000,000 shares (the "Company Firm Shares") of the Company's
Common Stock, $0.01 par value per share (the "Common Stock"), and the
stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") propose to sell an aggregate of 122,078 shares (the "Selling
Stockholder Shares") of Common Stock, in each case 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 Company has also agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional 168,312
shares of Common Stock, on the terms and for the purposes set forth in Section
1(b) (the "Option Shares"). The Company Firm Shares and the Selling Stockholder
Shares are referred to collectively herein as the "Firm Shares," the Company
Firm Shares and the Option Shares are sometimes referred to collectively herein
as the "Company Shares" and the Firm Shares and the Option Shares are referred
to collectively herein as the "Shares."
The Company and each of the Selling Stockholders confirm as follows
their respective 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
of the Company and the Selling Stockholders herein contained and subject to all
the terms and conditions of this Agreement, (i) the Company agrees to issue and
sell the Company Firm Shares to the several Underwriters, (ii) each Selling
Stockholder, severally and not jointly, agrees to sell to the several
Underwriters the respective number of Selling Stockholder Shares set forth
opposite that Selling Stockholders's name on Schedule II hereto and (iii) each
of the Underwriters, severally and
- ------------------------------------
Plus an option to purchase up to an additional 168,312 shares to cover
over-allotments.
-1-
<PAGE>
not jointly, agrees to purchase from the Company and the Selling Stockholders
the respective number of Firm Shares set forth opposite that Underwriter's name
in Schedule I hereto, at the purchase price of $____ for each Firm Share. The
number of Firm Shares to be purchased by each Underwriter from the Company and
each Selling Stockholder shall be as nearly as practicable in the same
proportion to the total number of Firm Shares being sold by the Company and each
Selling Stockholder as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants 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 Firm
Shares. The Option may be exercised only to cover over-allotments 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, 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 will issue and
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 Firm 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 Firm Shares shall be made
--------------------
to the Representatives for the accounts of the Underwriters against payment of
the purchase price by certified or official bank check or by wire transfers
payable in same-day funds to the order of the Company for the Company Firm
Shares to be sold by it and to __________, as custodian for the Selling
Stockholders (the "Custodian") for the Firm Shares to be sold by the Selling
Stockholders 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) 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) The Company meets the requirements for use of Form S-3 and a
registration statement (Registration No. 333-_______) on Form S-3 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
-2-
<PAGE>
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,
including the documents incorporated by reference therein, 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 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 all documents incorporated by
reference therein, 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, including the documents incorporated by reference therein, 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, including the
documents incorporated by reference therein, 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,
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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) in 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.
(d) All of the outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) 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 Firm 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 and its consolidated subsidiaries as of the respective dates
thereof and the results of operations and cash flows of the Company and its
consolidated subsidiaries 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 consolidated financial, pro forma 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,
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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, 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.
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<PAGE>
(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.
(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 and its consolidated subsidiaries purported to be
shown thereby for the periods 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
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<PAGE>
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 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 Firm Shares and
Option 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.
(aa) The documents that are incorporated by reference in the
preliminary prospectus and the Prospectus or from which information is so
incorporated by reference, when they became or become effective or were or are
filed with the Commission, as the case may be, complied or will comply in all
material respects with the requirements of the Act or the Exchange Act, as
applicable, and the Rules and Regulations or the Exchange Act Rules and
Regulations, as applicable; and any documents so filed and incorporated by
reference subsequent to the Effective Date shall, when they are filed with the
Commission, comply in all material respects with the requirements of the Act or
the Exchange Act, as applicable, and the Rules and Regulations or the Exchange
Act Rules and Regulations, as applicable.
4. Representations and Warranties of the Selling Stockholder. Each
---------------------------------------------------------
Selling Stockholder, severally and not jointly, represents, warrants and
covenants to each Underwriter 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 Selling
Stockholder 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.
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<PAGE>
(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 Selling Stockholder 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 good and
valid title to the Selling Stockholder Shares to be sold by such Selling
Stockholder hereunder, free and clear of all liens, encumbrances, equities or
claims; and, upon delivery of such Selling Stockholder and payment therefor
pursuant hereto, good and valid title to such Selling Stockholder , 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, each 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).
Each of the Selling Stockholders represents and warrants that
certificates in negotiable form representing all of the Selling Stockholder 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
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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 "Attorney-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 Selling Stockholder 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.
Each of the Selling Stockholders specifically agrees that the Selling
Stockholder 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.
Each of the Selling Stockholders 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 a Selling Stockholder or by the occurrence
of any other event. If a 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 Selling Stockholder shall
be delivered by or on behalf of such Selling Stockholder in accordance with the
terms and conditions of this Agreement 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.
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(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. The Company will not file any document under the Exchange Act or the
Exchange Act Rules and Regulations before the termination of the offering of the
Shares by the Underwriters, if such document would be deemed to be incorporated
by reference into the Prospectus, that is not approved by the Representatives
after reasonable notice thereof.
(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 and the Selling Stockholders 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, 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, 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
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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 9 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.
(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 II hereto.
6. Agreements of the Selling Stockholders. The Selling
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Stockholders agree to pay (directly or by reimbursement) all fees and expenses
incident to the performance of their obligations under this Agreement that are
not otherwise specifically provided for herein, including but not limited to any
fees and expenses of counsel for such Selling Stockholders, any fees and
expenses of the Attorneys-in-Fact and the Custodian, and all expenses and taxes
incident to the sale and delivery of the Shares to be sold by such Selling
Stockholders to the Underwriters hereunder.
Each Selling Stockholder hereby agrees that he, she or it will not,
without the prior written approval of Needham & Company, Inc., 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 the public trading market, for a period of 90 days commencing
on the Closing Date.
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 that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the
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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 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 Stockholders 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 or the Selling Stockholders and all
conditions contained herein to be fulfilled or complied with by the Company or
the Selling Stockholders 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 Stockholders, covering the following matters (except that the matters
set forth in subparagraphs (xv) through (xviii) need not be addressed in the
opinion delivered at the Option Closing Date, if later than the 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;
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(iii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof incorporated by reference 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
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 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) 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;
(xi) 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;
(xii) 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
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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;
(xiii) as of the Effective Date, the Shares were duly
authorized for listing on the NNM upon official notice of issuance;
(xiv) the documents incorporated by reference in the
Prospectus (other than the financial statements, schedules and other financial
data contained therein, as to which such counsel need express no opinion), when
they were filed with the Commission, complied as to form in all material
respects with the requirements of the Exchange Act and the Exchange Act Rules
and Regulations;
(xv) the Agreement and the Custody Agreement have each been
duly executed and delivered by or on behalf of the Selling Stockholders and the
Custody Agreement constitutes a valid and binding agreement of each 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 each Selling Stockholder hereunder, the performance by
each 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
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 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 such
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 each 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 Closing
Date such Selling Stockholder had good and valid title to the Selling
Stockholder Shares to be sold 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 Selling
Stockholder Shares to be sold by such Selling Stockholder hereunder;
(xviii) good and valid title to such Selling Stockholder
Shares, free and clear of any adverse claim, has been transferred to each of the
several Underwriters who have purchased such Selling Stockholder 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 Stockholders 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.
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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 LLP, 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 Closing Date, a
certificate dated the Closing Date, signed by the Selling Stockholders (or the
Attorneys-in-Fact on their behalf) to the effect that the representations and
warranties of the Selling Stockholders 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 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 II hereto referred to in Section 4(n).
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(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 and the Selling Stockholders 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 and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of its and their
respective obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Representatives.
8. Indemnification.
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(a) The Company and each of the Selling Stockholders, 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 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, but only, with respect to each Selling Stockholder,
insofar as such losses, claims, liabilities, expenses and 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 written information
furnished to the Company by such Selling Stockholder for use therein,(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 Stockholders contained herein or
(iii) arise out of or are based upon any failure of the Company or the Selling
Stockholders to perform its or their obligations hereunder or under law in
connection with the transactions contemplated hereby; provided that the Company
and the Selling Stockholders 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 Stockholders 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 each 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 Firm Share set forth in Section 1(b)
multiplied by the number of Selling Stockholder Shares sold by such Selling
Stockholder hereunder. The Company and the Selling Stockholders 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
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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 Stockholders 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 Stockholders to the same extent as the foregoing indemnity from the
Company and the Selling Stockholders 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 Stockholders
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 sall, 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 6 unless,
and only to the extent that, such omission results in the loss of 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 Stockholders
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
-17-
<PAGE>
of, any action, suit or proceeding or any claim asserted, but after deducting
any contribution received by the Company or the Selling Stockholders 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 Stockholders 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
Stockholders on the one hand and the Underwriters on the other hand. The
relative benefits received by the Company and the Selling Stockholders 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 Stockholders 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
Stockholders 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 Stockholders 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 Stockholders 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 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
Stockholders 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
Stockholders 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
-18-
<PAGE>
Stockholders 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 and the Selling Stockholders from the Representatives,
without liability on the part of any Underwriter to the Company or the Selling
Stockholders if, prior to delivery and payment for the Firm 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.
11. Substitution of Underwriters. If any one or more of the
----------------------------
Underwriters shall fail or refuse to purchase the Firm Shares which it or they
have agreed to purchase hereunder, and the aggregate number of Firm 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 Firm Shares, the
other Underwriters shall be obligated, severally, to purchase the Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm 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 Firm 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 Firm Shares
without the prior written consent of such Underwriter. If any Underwriter or
Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase exceeds one-tenth of the aggregate number of
the Firm Shares and arrangements satisfactory to the Representatives and the
Company for the purchase of such Firm 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 or to the Selling Stockholders, 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., 445 Park Avenue, New York, New York
10022, Attention: Corporate Finance Department, with a copy to Stanton D. Wong,
Esq., Pillsbury Madison & Sutro LLP, 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.
-19-
<PAGE>
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, the Selling Stockholders 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.
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 STOCKHOLDERS
By:___________________________________
Title:________________________________
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
NEEDHAM & COMPANY, INC.
SOUNDVIEW FINANCIAL GROUP, INC.
UNTERBERG HARRIS
As Representatives of the several
Underwriters listed on Schedule I
By NEEDHAM & COMPANY, INC.
-20-
<PAGE>
By_____________________________
Title__________________________
-21-
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Firm
Shares
Underwriters to be Purchased
- ------------ ---------------
Needham & Company, Inc. ...................................
SoundView Financial Group, Inc. ...........................
Unterberg Harris ..........................................
------------
Total ................................................ 1,122,078
============
-22-
<PAGE>
SCHEDULE II
Total Number Total Number of
of Firm Shares Option Shares
to be Sold to be Sold
---------- ----------
IKOS Systems, Inc. ................... 1,000,000 168,312
Melissa Barton........................ 59 0
Jonathan W. Babb...................... 5,732 0
MIT................................... 14,020 0
Allen H. Michels(1)................... 25,997 0
Concord Partners II, L.P. ............ 65,851 0
Dillon, Read & Co., Inc. as agent..... 9,471 0
Lexington Partners IV, L.P. .......... 948 0
(1) Pursuant to the exercise of stock options.
- ---------------------------------------------
-23-
<PAGE>
SCHEDULE III
FORM OF LOCK-UP AGREEMENT
May ___, 1996
NEEDHAM & COMPANY, INC.
SOUNDVIEW FINANCIAL GROUP, INC.
UNTERBERG HARRIS
c/o Needham & Company, Inc.
400 Park Avenue
New York, New York 10022
The undersigned is a holder of securities of IKOS Systems, Inc., a
Delaware 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-3 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.
Very truly yours,
________________________________________________
Print Name of Stockholder
________________________________________________
Signature
-24-
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
among IKOS Systems, Inc.
VMW Acquisition Corporation,
and Virtual Machine Works, Inc.
May 14, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
1. Definitions................................................ 1
2. Plan of Reorganization..................................... 4
2.1 The Merger........................................... 4
2.2 Cancellation of Shares; Delivery of Consideration and
Assumption of Options................................ 5
2.3 Exchange Procedures.................................. 5
2.4 Fractional Shares.................................... 8
2.5 Appraisal Rights..................................... 8
2.6 The Closing.......................................... 8
2.7 Effective Time....................................... 8
3. Representations and Warranties of VMW...................... 8
3.1 Organization......................................... 9
3.2 Capitalization....................................... 9
3.3 Authority Relative to this Agreement................. 10
3.4 Financial Statements................................. 10
3.5 Tax Matters.......................................... 11
3.6 Absence of Certain Changes or Events................. 12
3.7 Title and Related Matters............................ 13
3.8 Proprietary Assets................................... 14
3.9 Employee Benefit Plans............................... 15
3.10 Bank Accounts........................................ 16
3.11 Contracts............................................ 16
3.12 Orders, Commitments and Returns...................... 18
3.13 Compliance With Law.................................. 18
3.14 Labor Difficulties................................... 18
3.15 Trade Regulation and Practices....................... 19
3.16 Insider Transactions................................. 19
3.17 Employees, Independent Contractors and Consultants... 19
3.18 Insurance............................................ 19
3.19 Litigation........................................... 20
3.20 Governmental Authorizations and Regulations.......... 20
3.21 Corporate Minutes, Etc............................... 20
3.22 Subsidiaries......................................... 20
3.23 Compliance with Environmental Requirements........... 20
3.24 Corporate Documents and Contracts.................... 21
3.25 No Brokers........................................... 22
3.26 Disclosure........................................... 22
4. Representations and Warranties of IKOS and Sub............. 22
4.1 Organization and Good Standing....................... 22
4.2 Power, Authorization and Validity.................... 22
4.3 No Violation of Existing Agreements.................. 23
</TABLE>
i
<PAGE>
Table Of Contents, continued
<TABLE>
<C> <S> <C>
4.4 Compliance With Other Instruments and Laws........... 23
4.5 Financial Condition.................................. 23
4.6 No Brokers........................................... 23
4.7 Disclosure........................................... 23
4.8 Valid Issuance of IKOS Common Stock.................. 23
5. Preclosing Covenants of VMW................................ 24
5.1 Advice of Changes.................................... 24
5.2 Conduct of Business.................................. 24
5.3 Risk of Loss......................................... 25
5.4 Access to Information................................ 25
5.5 Regulatory Approvals................................. 26
5.6 Satisfaction of Conditions Precedent................. 26
5.7 Stockholder Vote..................................... 26
5.8 Irrevocable Proxies.................................. 26
5.9 Employment Arrangements.............................. 26
5.10 Nonaccredited Stockholders........................... 27
6. Preclosing and Postclosing Covenants of IKOS and Sub....... 27
6.1 Advice of Changes.................................... 27
6.2 Regulatory Approvals................................. 27
6.3 Satisfaction of Conditions Precedent................. 27
6.4 Directors' and Officers' Indemnification............. 27
7. Mutual Covenants........................................... 28
7.1 Confidentiality...................................... 28
7.2 Exclusivity.......................................... 29
7.3 Further Assurances................................... 29
7.4 Form S-8............................................. 29
7.5 NASDAQ Listing....................................... 29
8. The Closing................................................ 30
8.1 Merger............................................... 30
8.2 Additional Documents................................. 30
9. Conditions to VMW's Obligations............................ 30
9.1 Accuracy of Representations and Warranties........... 30
9.2 Covenants............................................ 30
9.3 No Litigation........................................ 30
9.4 Authorizations....................................... 31
9.5 No Adverse Development............................... 31
9.6 Government Consents.................................. 31
9.7 Federal and State Securities Laws.................... 31
9.8 IKOS Certificate..................................... 31
</TABLE>
ii
<PAGE>
Table Of Contents, continued
<TABLE>
<C> <S> <C>
9.9 Opinion of IKOS's Counsel........................... 31
9.10 Registration Rights Agreement....................... 31
10. Conditions to IKOS and Sub's Obligations................... 32
10.1 Accuracy of Representations and Warranties.......... 32
10.2 Covenants........................................... 32
10.3 No Litigation....................................... 32
10.4 Authorizations...................................... 32
10.5 No Adverse Development.............................. 32
10.6 Required Consents................................... 33
10.7 Opinion of VMW's Counsel............................ 33
10.8 Fairness Opinion of Needham & Company, Inc.......... 33
10.9 Non-Compete and Non-Solicitation Agreements......... 33
10.10 Stockholder Approval................................ 33
10.11 Employment with IKOS................................ 33
10.12 Government Consents................................. 33
10.13 Waiver of Option Acceleration....................... 33
10.14 Investment Representations.......................... 34
10.15 Forgiveness or Repayment of Certain Loans........... 34
10.16 Exercise of Warrants................................ 34
11. Termination of Agreement................................... 34
11.1 Mutual Agreement.................................... 34
11.2 Failure to Fulfill Conditions....................... 34
11.3 No Liability........................................ 34
11.4 Effect of Termination............................... 34
12. Indemnification and Escrow................................. 34
12.1 Survival of Representations......................... 34
12.2 Indemnification by VMW Stockholders................. 35
12.3 Threshold; Ceiling; Exclusivity..................... 36
12.4 Limitations Relating to VMW Proprietary Assets
Claims.............................................. 36
12.5 Satisfaction of Indemnification Claim............... 37
12.6 No Contribution..................................... 37
12.8 Interest............................................ 37
12.9 Defense of Third Party Claims....................... 37
12.10 Exercise of Remedies by Indemnitees Other Than IKOS. 39
12.11 Indemnity Escrow.................................... 39
12.12 VMW Stockholder Representatives..................... 40
13. Miscellaneous.............................................. 40
13.1 Governing Laws...................................... 40
13.2 Binding upon Successors and Assigns................. 41
13.3 Severability........................................ 41
</TABLE>
iii
<PAGE>
Table Of Contents, continued
<TABLE>
<C> <S> <C>
13.4 Entire Agreement.................................... 41
13.5 Counterparts........................................ 41
13.6 Expenses............................................ 41
13.7 Other Remedies...................................... 42
13.8 Amendment and Waivers............................... 42
13.9 Survival of Agreements.............................. 42
13.10 No Waiver........................................... 42
13.11 Attorneys' Fees..................................... 42
13.12 Notices............................................. 43
13.13 Time................................................ 43
13.14 Construction of Agreement........................... 43
13.15 No Joint Venture.................................... 44
13.16 Pronouns............................................ 44
13.17 Further Assurances.................................. 44
13.18 Absence of Third Party Beneficiary Rights........... 44
13.19 Arbitration......................................... 44
EXHIBIT A CERTIFICATE OF MERGER............................... 47
EXHIBIT B MERGER CONSIDERATION SCHEDULE....................... 48
EXHIBIT C IRREVOCABLE PROXY................................... 49
EXHIBIT D NONCOMPETE AND NONSOLICITATION AGREEMENT............ 50
EXHIBIT E REGISTRATION RIGHTS AGREEMENT....................... 51
EXHIBIT F INVESTOR REPRESENTATION LETTER...................... 52
EXHIBIT G INDEMNITY ESCROW AGREEMENT.......................... 53
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into
this 14th day of May, 1996, by and among IKOS Systems, Inc. a Delaware
corporation ("IKOS"), VMW Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of IKOS ("Sub"), and Virtual Machine Works, Inc., a
Delaware corporation ("VMW").
RECITAL
The parties intend that, subject to the terms and conditions hereinafter
set forth, Sub shall be merged with and into VMW, with VMW the surviving
corporation, pursuant to a Certificate of Merger substantially in the form
attached hereto as Exhibit A (the "Certificate of Merger") and the applicable
---------
provisions of the laws of the State of Delaware. Upon the Merger, the holders
of capital stock and warrants to acquire capital stock of VMW shall be entitled
to receive cash and stock of IKOS and the holders of options of VMW shall
receive options to purchase IKOS Common Stock, in the manner and on the basis
determined herein, all as provided in the Certificate of Merger.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for the
consideration and mutual covenants set forth herein, the parties agree as
follows:
1. DEFINITIONS.
1.1 "Affiliate" shall have the meaning set forth in the rules and
regulations promulgated by the Commission pursuant to the Securities Act.
1.2 "Aggregate Consideration" shall mean the total aggregate
consideration to be paid by IKOS to the stockholders, warrant holders and option
holders of VMW in the form of cash, IKOS Common Stock and IKOS Common Stock
subject to warrants and options, which collectively shall not exceed Fifteen
Million Dollars ($15,000,000) reduced on a dollar for dollar basis by any funds
advanced by IKOS to VMW in connection with the transactions contemplated hereby
and used by VMW prior to April 30, 1996; provided, however, that such reduction
shall be the difference between (i) funds advanced by IKOS to VMW and (ii) funds
used by VMW prior to April 30, 1996 in excess of $250,000.
1.3 "IKOS Closing Price" shall mean the average of the closing sales
prices of IKOS Common Stock as reported by the Nasdaq National Market for the
ten (10) trading days preceding (but not including) the Closing Date.
1.4 "Closing" and "Closing Date" shall have the meanings set forth in
Section 2.6 ("The Closing").
1.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1
<PAGE>
1.6 "Commission" shall mean the Securities and Exchange Commission.
1.7 "Confidential Information" shall mean that information of a party
("Disclosing Party") which is disclosed to another party ("Receiving Party")
pursuant to this Agreement, in written form and marked "Confidential." If
Confidential Information is initially disclosed orally, the Disclosing Party
shall send a written summary of such information to the Receiving Party within
forty (40) days of disclosure and mark such summary "Confidential."
Confidential Information shall include, but not be limited to, trade secrets,
know-how, inventions, techniques, processes, algorithms, software programs,
schematics, designs, contracts, customer lists, financial information, sales and
marketing plans and business information.
1.8 "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, tax, fee (including reasonable attorneys' fees), charge, costs
(including costs of investigation) or expense of any nature, net of insurance
recovery or reimbursement or tax benefits realized.
1.9 "Effective Time" shall mean the time the Merger becomes effective
as defined in Section 2.7 ("Effective Time").
1.10 "Exchange Ratio" shall mean the VMW Common Share Price divided by
the IKOS Closing Price.
1.11 "VMW Products" shall mean all versions and implementations of any
product which has been or is being marketed by VMW or currently is under
development.
1.12 "VMW Preferred Shares" shall mean the shares of VMW preferred
stock issued and outstanding at the Effective Time.
1.13 "VMW Common Shares" shall mean the shares of VMW common stock
issued and outstanding at the Effective Time, other than shares held by holders
who perfect their appraisal rights under Delaware law with respect thereto
("Dissenting Shares").
1.14 "VMW Common Share Price" shall mean $3.00 per share.
1.15 "Entity" shall mean corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
1.16 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.17 "Indemnity Escrow" shall have the meaning set forth in Section
12.11 ("Indemnity Escrow").
2
<PAGE>
1.18 "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body, or Entity and any court or
other tribunal).
1.19 "Indemnification Period" shall mean the period commencing on the
Closing Date and ending at the close of business on the first anniversary of the
Closing Date.
1.20 "Indemnitees" shall mean the following Persons: (a) IKOS or Sub;
(b) IKOS's current and future affiliates; (c) the respective Representatives of
the Persons referred to in clauses "(a)" and "(b)" above; and (d) the respective
successors and assigns of the Persons referred to in clauses "(a)" and "(b)" and
"(c)" above; provided, however, that any Person receiving IKOS Common Stock
pursuant to this Agreement shall not be deemed to be an "Indemnitee."
1.21 "Key Employees" shall mean Charles Selvidge, Ken Crouch, W. Kem
Stewart, Charles Berg, Bill Fletcher, Josh Marantz and Matt Dahl.
1.22 "Legal Proceeding" shall mean any action, suit, litigation,
arbitration proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding), hearing, inquiry, audit, examination or
investigation commenced, brought, conducted or heard by or before, or otherwise
involving any court or other Governmental Body or any arbitrator or arbitration
panel.
1.23 "Material" when capitalized and used in reference to the
business, products or financial situation of VMW shall be construed, except as
specifically provided, to qualify the matter referred to herein to matters with
a value in excess of $50,000. For example, a "Material adverse effect" would be
an adverse effect resulting in costs or expenses in excess of $50,000. When the
word "material" is not capitalized it shall mean material with respect to the
matter referenced. For example, a reference to a material breach of a
particular agreement would mean a breach that is material with respect to the
particular contract (and not necessarily with respect to the overall business of
VMW or IKOS).
1.24 "Merger" shall mean the merger of Sub with and into VMW, on the
terms and conditions described herein.
1.25 "Options" shall mean the outstanding options to acquire VMW
Common Stock.
1.26 "Person" shall mean any individual, Entity or Governmental Body.
1.27 "Proprietary Asset" shall mean: (a) any patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious
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business name, service mark (whether registered or unregistered), service mark
application, copyright (whether registered or unregistered), copyright
application, maskwork, maskwork application, trade secret, know-how, customer
list, franchise, system, computer software, computer program, invention, design,
blueprint, engineering drawing, proprietary product, technology, proprietary
right or other intellectual property right or intangible asset; and (b) any
right to use or exploit any of the foregoing including rights granted by third
parties under license agreements.
1.28 "Securities" shall mean the VMW Shares, the shares to be canceled
pursuant to Section 2.2(a), Dissenting Shares and the Options.
1.29 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.30 "Transaction Documents" shall mean all documents or agreements
required to be delivered by any party hereunder including the Certificate of
Merger.
1.31 "VMW Shares" mean collectively the VMW Common Shares and the VMW
Preferred Shares.
2. PLAN OF REORGANIZATION.
2.1 THE MERGER. Subject to the terms and conditions of this
Agreement, Sub shall be merged with and into VMW in accordance with the
applicable provisions of the laws of Delaware and with the terms and conditions
of this Agreement so that:
(a) At the Effective Time, Sub shall be merged with and into VMW.
As a result of the Merger, the separate corporate existence of Sub shall cease
and VMW shall continue as the surviving corporation (sometimes referred to
herein as the "Surviving Corporation") and shall succeed to and assume all of
the rights and obligations of VMW in accordance with the laws of Delaware.
(b) The Certificate of Incorporation and Bylaws of VMW in effect
immediately prior to the Effective Time shall be the certificate of
incorporation and bylaws, respectively, of Surviving Corporation after the
Effective Time unless and until further amended as provided by law.
(c) The directors and officers of Sub immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation
after the Effective Time. Such directors and officers shall hold their position
until the election and qualification of their respective successors or until
their tenure is otherwise terminated in accordance with the Bylaws of Surviving
Corporation.
2.2 CANCELLATION OF SHARES; DELIVERY OF CONSIDERATION AND ASSUMPTION
OF OPTIONS.
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(a) At the Effective Time, each share of VMW capital stock, if
any, that is owned directly or indirectly by VMW shall be canceled and no cash
or other consideration shall be delivered in exchange therefor.
(b) At the Effective Time, each VMW Share shall, by virtue of the
Merger, and without further action on the part of any holder thereof, be
converted into the right to receive such consideration as set forth on Exhibit B
---------
(the "Merger Consideration Schedule"); provided, however, that such amount made
available by IKOS shall not exceed the Aggregate Consideration in accordance
with Sections 2.2 ("Cancellation of Shares; Delivery of Consideration and
Assumption of Options") and 2.3 ("Exchange Procedures"); provided, however, that
the right to receive certain portions of such amounts or to receive such amounts
with respect to certain VMW Shares shall be subject to Section 12.11 hereof (the
"Indemnity Escrow"), and to applicable tax withholding and reporting
requirements.
(c) At the Effective Time, each share of capital stock of Sub
outstanding immediately prior to the Merger shall, by virtue of the Merger, and
without further action on the part of any holder thereof, continue to be issued
and shall be converted into one share of VMW common stock outstanding after the
Merger.
2.3 EXCHANGE PROCEDURES.
(a) Immediately after the Effective Time, each holder of a
certificate or certificates (each a "Certificate" and collectively, the
"Certificates") representing shares of VMW capital stock issued and outstanding
immediately prior to the Effective Time shall surrender such Certificate(s) to
an officer of VMW designated for such purpose. Each Certificate which
immediately before the Effective Time evidenced VMW capital stock shall, from
and after the Effective Time until such Certificate is surrendered to VMW or its
transfer agent, be deemed, for all corporate purposes, to evidence the right to
receive the consideration described above; provided, however, that no dividend
or other distribution payable to the holder of such Certificate after the
Effective Time shall be paid in respect of such Certificate until such
Certificate is so surrendered by such holder.
(b) At the Effective Time, IKOS shall make available to each VMW
Stockholder such consideration as set forth on Exhibit B (the "Merger
---------
Consideration Schedule"); provided, however, that such amount made available by
IKOS to all VMW Stockholders, option holders or warrant holders shall not exceed
the Aggregate Consideration.
(c) Each VMW Option that is outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and at the Effective Time,
automatically and without further action on the part of any holder thereof, be
assumed by IKOS and converted into an option (an "IKOS Option") to purchase that
number of shares of IKOS Common Stock registered pursuant to Section 7.4 hereof
which equals the VMW Common Share Price divided by the IKOS Closing Price (the
"Exchange Ratio") multiplied by the number of shares of VMW Common Stock
purchasable under the VMW Option immediately prior to the Effective Time. The
exercise price per share of IKOS Common Stock purchasable under each such IKOS
Option will be equal to the exercise price of the
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VMW Option (per share of VMW Common Stock) divided by the Exchange Ratio.
Continuous employment with VMW, whether occurring before or after the Effective
Time, shall be credited to an optionee for purposes of determining the number of
shares subject to exercise, vesting or repurchase after the Effective Time.
After the Effective Time, IKOS shall issue to each holder of an outstanding VMW
Option a document evidencing the foregoing assumption by IKOS. No fractional
shares of VMW Common Stock shall be issued in connection with IKOS Options. All
fractional shares which would otherwise be issuable shall be provided for in
accordance with Section 2.4 hereof ("Fractional Shares"). All of the other terms
of each VMW Option assumed by IKOS including, without limitation, the vesting
period, will remain the same; provided, however, that the IKOS options to be
issued to VMW option holders will permit accelerated vesting upon termination
for reasons other than for Cause (as defined below) or upon Constructive
Termination (as defined below), during the time that his or her options are
subject to vesting restrictions. Notwithstanding the foregoing, the IKOS option
to be issued to Allen H. Michels in exchange for his option to purchase VMW
Stock shall be fully vested and exercisable upon the issuance thereof to Mr.
Michels.
(d) As used herein, the term "Cause" shall mean any one or more
of the following:
(i) theft, dishonesty, or falsification of records;
(ii) improper use or disclosure of confidential or
proprietary information;
(iii) any action by an employee which has a materially
adverse effect on IKOS' reputation or business;
(iv) an employee's failure or inability to perform any
reasonable assigned duties after written notice from IKOS, and a reasonable
opportunity to cure, such failure or inability;
(v) any material breach by an employee of any employment
agreement between the employee and IKOS, which breach is not cured pursuant to
the terms of such agreement; or
(vi) an employee's conviction of any criminal felony act
which impairs the employee's ability to perform his or her duties for IKOS.
(e) As used herein, the term "Constructive Termination" shall
mean any one or more of the following:
(i) without express written consent, the assignment of any
duties, or any limitation of responsibilities, substantially inconsistent with
the positions, duties, responsibilities and status immediately prior to the
effectiveness of the Merger;
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(ii) without express written consent, the relocation of the
principal place of employment to a location that is more than fifty (50) miles
from the principal place of employment immediately prior to the date of the
effectiveness of the Merger, or the imposition of travel requirements
substantially more demanding than such travel requirements existing immediately
prior to the date of the effectiveness of the Merger; or
(iii) any failure by IKOS to pay, or any material reduction
by IKOS of, (A) base salary in effect immediately prior to the date of the
effectiveness of the Merger (unless reductions comparable in amount and duration
are concurrently made for all other employees of IKOS with comparable
responsibilities, comparable organizational level and comparable title), or (B)
bonus compensation, if any, in effect immediately prior to the date of the
effectiveness of the Merger (subject to applicable performance requirements with
respect to the actual amount of earned bonus compensation).
(f) Notwithstanding anything to the contrary in this Section 23
("Exchange Procedures"), no party hereto shall be liable to a holder of shares
of VMW capital stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
(g) In the event any Certificates evidencing VMW capital stock
shall have been lost, stolen or destroyed, IKOS shall issue in exchange for such
lost, stolen or destroyed certificates, the cash amount otherwise issuable under
Section 2.2 ("Cancellation of Shares; Delivery of Consideration and Assumption
of Options") upon the making of an affidavit of that fact by the holder thereof,
provided, however, IKOS may, in its discretion and as a condition precedent to
the issue thereof, require the owner of such lost, stolen or destroyed
Certificates to indemnify IKOS against any claim that may be made against IKOS
with respect to the Certificate alleged to have been lost, stolen or destroyed.
2.4 FRACTIONAL SHARES. No fractional shares of IKOS Common Stock
will be issued in connection with the Merger, but in lieu thereof, each holder
of VMW Stock who would otherwise be entitled to receive a fraction of a share of
IKOS Common Stock will receive from IKOS, promptly after the Effective Time, an
amount of cash equal to the IKOS Closing Price multiplied by the fraction of a
share of IKOS Common Stock to which such holder would otherwise be entitled.
2.5 APPRAISAL RIGHTS. Any Dissenting Shares shall not receive the
VMW Share Price in cash but shall be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares pursuant to the law of the State of Delaware. VMW shall give IKOS prompt
notice of any demand received by VMW for appraisal of VMW capital stock, and
IKOS shall have the right to participate in all negotiations and proceedings
with respect to such demand. VMW agrees that, except with the prior written
consent of IKOS or as required under the Delaware General Corporation Law, it
will not voluntarily make any payment with respect to, or settle or offer to
settle, any such demand for appraisal. Each holder of Dissenting Shares
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("Dissenting Stockholder") who, pursuant to the provisions of the Delaware
General Corporation Law, becomes entitled to payment of the value of shares of
VMW common stock or VMW preferred stock shall receive payment therefor (but only
after the value therefor shall have been agreed upon or finally determined
pursuant to such provisions). In the event of legal obligation, after the
Effective Time, to deliver the VMW Share Price to a holder of shares of VMW
capital stock who shall have failed to make an effective demand for appraisal or
shall have lost his status as a Dissenting Stockholder, IKOS shall deliver, upon
surrender by such holder of his certificate or certificates representing shares
of VMW capital stock, as applicable, the cash to which such holder is then
entitled under Section 2.2 ("Cancellation of Shares; Delivery of Consideration
and Assumption of Options").
2.6 THE CLOSING. Subject to termination of this Agreement as
provided in Section 11 ("Termination of Agreement") below, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
the offices of Gray Cary Ware & Freidenrich, A Professional Corporation, 400
Hamilton Avenue, Palo Alto, California at 10:00 a.m. on May 23, 1996, or such
other place, time and date as IKOS and VMW may mutually select (the "Closing
Date").
2.7 EFFECTIVE TIME. Simultaneously with the Closing, the Certificate
of Merger shall be filed in the office of the Secretary of State of the State of
Delaware. The Merger shall become effective immediately upon the filing of the
Certificate of Merger with such offices (the "Effective Time").
3. REPRESENTATIONS AND WARRANTIES OF VMW.
Except as otherwise set forth in the "VMW Disclosure Schedule"
delivered as of the date hereof ("VMW Disclosure Schedule"), VMW represents and
warrants to IKOS as set forth below. No fact or circumstance disclosed to IKOS
shall constitute an exception to these representations and warranties unless
such fact or circumstance is set forth in the VMW Disclosure Schedule with
specific reference to the primary representation as to which it is an exception.
Whenever the term "enforceable in accordance with its terms" or like expression
is used, it is understood that excepted therefrom are any limitations on
enforceability under applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting the enforcement of
creditor's rights.
3.1 ORGANIZATION. VMW is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
corporate power and authority to carry on its business as it is now being
conducted. VMW is duly qualified or licensed to do business and in good
standing in each jurisdiction in which the nature of its business or properties
makes such qualification or licensing necessary except to the extent that any
failure to qualify or obtain licenses would not in the aggregate have a Material
adverse effect on the operations, assets, financial condition or prospects of
VMW. The VMW Disclosure Schedule contains a true and complete listing of the
locations of all sales offices, manufacturing facilities, and any other offices
or facilities of VMW and a true and complete list of all states in which VMW
maintains any employees. The VMW Disclosure Schedule contains a true and
complete list of all states in which VMW is duly qualified to transact business
as a foreign corporation.
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3.2 CAPITALIZATION.
(a) The authorized capital stock of VMW as of the date of this
Agreement consists of: (i) 4,200,000 shares of common stock and (ii) 1,652,632
shares of preferred stock and as of the date of this Agreement 787,464 shares of
VMW common stock and 1,652,632 shares of VMW preferred stock are issued and
outstanding and held of record by VMW's Stockholders as set forth and identified
in the VMW Disclosure Schedule.
(b) On the date of this Agreement 1,000,000 shares of VMW common stock
are available or reserved for issuance under the 1994 VMW Stock Option Plan (the
"VMW Plan"), and as of the date of this Agreement 785,000 shares are subject to
outstanding options and held of record by VMW's option holders as set forth and
identified in the option holder list provided to IKOS or its representatives.
There are outstanding warrants to purchase approximately 46,700 shares of VMW
Common Stock (the "Warrants").
(c) All of the outstanding Securities have been duly authorized and
are validly issued, fully paid and nonassessable. All outstanding Securities
were issued in compliance with applicable securities laws. None of the
outstanding Securities were issued in consideration in whole or in part for any
contribution, transfer or assignment of the VMW Products or proprietary assets
or any proprietary rights incorporated therein or otherwise related thereto.
Except as otherwise set forth in the VMW Disclosure Schedule, VMW does not have
any other shares of its capital stock issued or outstanding and does not have
any other outstanding subscriptions, options, warrants, rights or other
agreements or commitments obligating VMW to issue shares of its capital stock or
other securities.
3.3 AUTHORITY RELATIVE TO THIS AGREEMENT. VMW has the corporate
power to enter into this Agreement and the other Transaction Documents to which
it is a party (the "VMW Transaction Documents") and to carry out its obligations
hereunder and thereunder. The execution and delivery of this Agreement and the
VMW Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by its Board of Directors and no
other corporate proceedings on the part of VMW are necessary to authorize this
Agreement, the other VMW Transaction Documents and the transactions contemplated
herein and therein other than the consent of the holders of outstanding shares
of VMW. VMW is not subject to or obligated under any charter, bylaw or contract
provision or any license, franchise or permit, or subject to any order or
decree, which would be breached or violated by or in conflict with its executing
and carrying out this Agreement and the transactions contemplated hereunder and
under the Transaction Documents. Except as contemplated by this Agreement, no
consent of any person who is a party to a contract the loss or termination of
which could reasonably result in expenses or damages in excess of Twenty Five
Thousand Dollars ($25,000), nor consent of any Governmental Body is required to
be obtained on the part of VMW to permit the transactions contemplated herein
and continue the business activities of VMW as previously conducted by VMW.
This Agreement and the other VMW Transaction Documents when executed by VMW
shall be the valid and binding obligations of VMW enforceable in accordance with
its terms.
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3.4 FINANCIAL STATEMENTS.
(a) VMW has delivered to IKOS copies of (i) VMW's audited balance
sheet and statements of income, stockholder's equity and changes in financial
condition for the fiscal years ended December 31, 1993, 1994 and 1995 and (ii)
VMW's unaudited balance sheet as of April 30, 1996 (the "VMW Balance Sheet") and
statements of income, stockholders' equity and changes in financial position for
the period then ended.
(b) All financial statements delivered pursuant to Section 3.4(a)
(collectively, the "VMW Financial Statements") are complete and in accordance
with the books and records of VMW and present fairly the financial position of
VMW as of their historical dates. The VMW Financial Statements have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent with prior periods. Except as to the extent reflected or
reserved against in such balance sheets (including the notes thereto), VMW does
not have, as of the dates of such balance sheets, any Material liabilities or
obligations (absolute or contingent) of a nature required or customarily
reflected in a balance sheet (or the notes thereto) prepared in accordance with
generally accepted accounting principles. As of the Closing, the reserves, if
any, reflected on the VMW Balance Sheet are adequate in light of the
contingencies with respect to which they are made as required by generally
accepted accounting principles. The statements of income, stockholder's equity
and changes in financial position are complete and in accordance with the books
and records of VMW and present fairly the results of operations, equity
transactions and changes in financial position of VMW for the periods indicated
in all Material respects.
(c) VMW has no debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or to
become due, that is not reflected or reserved against in the VMW Financial
Statements, except for those (i) that may have been incurred after the date of
the VMW Financial Statements or (ii) that are not required by generally accepted
accounting principles to be included in a balance sheet or the notes thereto as
of the date of such balance sheet. All debts, liabilities, and obligations
incurred after the date of the VMW Financial Statements were incurred in the
ordinary course of business, and are usual and normal in amount both
individually and in the aggregate and none of which are Material (except with
respect to manufacturing purchase orders, none of which exceeds $50,000).
3.5 TAX MATTERS.
(a) VMW has fully and timely, properly and accurately filed all
tax returns and reports required to be filed by it, including all federal,
foreign, state and local tax returns and estimates for all years and periods
(and portions thereof) for which any such returns, reports or estimates were
due. All such returns, reports and estimates were prepared in all material
respects in the manner required by applicable law. All income, sales, use,
occupation, property or other taxes or assessments due from VMW have been paid.
There are no pending assessments, asserted deficiencies or claims for additional
taxes that have not been paid. The reserves for taxes, if any, reflected on the
VMW Balance Sheet are adequate as of the Closing, in accordance with generally
accepted
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accounting principles, and there are no tax liens on any property or assets of
VMW. There have been no examinations of any tax returns or reports by any
applicable Governmental Body. No state of facts exists or has existed which
would constitute grounds for the assessment of any penalty or of any further tax
liabilities beyond that shown on the respective tax reports, returns or
estimates. There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any income tax return or report for
any period.
(b) All taxes which VMW has been required to collect or withhold
have been duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority.
(c) VMW does not have a permanent establishment in any foreign
country, as defined in the relevant tax treaty between the United States of
America and such foreign country or under foreign law, and does not otherwise
operate or conduct business through any branch office in any foreign country.
(d) VMW is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(e) At no time has VMW been included in the federal consolidated
income tax return of any affiliated group of corporations.
(f) No payment which VMW is obliged to pay to any director,
officer, employee or independent contractor pursuant to the terms of an
employment agreement, severance agreement or otherwise will constitute an excess
parachute payment as defined in Section 280G of the Code.
(g) VMW will not be required to include any Material adjustment
in taxable income for any tax period (or portion thereof) ending after the
Closing Date pursuant to Section 481(c) of the Code or any provision of the tax
laws of any jurisdiction requiring tax adjustments as a result of a change in
method of accounting implemented by VMW prior the Closing Date for any tax
period (or portion thereof) ending on or before the Closing Date or pursuant to
the provisions of any agreement entered into by VMW prior to the Closing Date
with any taxing authority with regard to the tax liability of VMW for any tax
period (or portion thereof) ending on or before the Closing Date.
(h) There is no contract, agreement, plan or arrangement,
including, but not limited to, the provisions of this Agreement, covering any
employee or independent contractor or former employee or former independent
contractor of VMW that would not be deductible pursuant to Section 280G, 162 or
404 of the Code.
(i) VMW has provided or made available to IKOS true and correct
copies of all tax returns filed by VMW, and, as requested by IKOS prior to the
date hereof, information statements, reports, work papers, records, tax
opinions, examination reports, statutory or preliminary notices of deficiency,
and tax memorandum.
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(j) VMW has not, with regard to any property or assets held,
acquired or to be acquired by it, at any time, filed a consent to the
application of Section 341(f)(2) of the Code nor will any such consent be filed
before the Closing.
3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the VMW
Balance Sheet, VMW has not (a) suffered any Material adverse change in its
financial condition or in the operations of its business; (b) suffered any
damage, destruction or loss, whether covered by insurance or not, Materially and
adversely affecting its properties or businesses; (c) granted any increase in
the compensation payable or to become payable by VMW to its officers or
employees other than in the ordinary course of business; (d) declared, set aside
or paid any dividend or made any other distribution on or in respect of the
shares of the capital stock of VMW or declared any direct or indirect
redemption, retirement, purchase or other acquisition by VMW of such shares; (e)
issued any shares of capital stock of VMW or any warrants, rights, options or
entered into any commitment relating to the shares of VMW except for the
issuance of VMW Shares pursuant to the exercise of outstanding options; (f) made
any change in the accounting methods or practices it follows, whether for
general financial or tax purposes, or any change in depreciation or amortization
policies or rates adopted therein; (g) sold, leased, abandoned or otherwise
disposed of any real property or any machinery, equipment or other operating
property other than in the ordinary course of business (h) sold, assigned,
transferred, licensed or otherwise disposed of any patent, trademark, trade
name, brand name, copyright (or pending application for any patent, trademark or
copyright) invention, process, know-how, formula or trade secret or interest
thereunder or other intangible asset except in the ordinary course of its
business; (i) suffered any labor dispute; (j) engaged in any activity or entered
into any Material commitment or transaction (including without limitation any
borrowing or capital expenditure) other than in the ordinary course of business;
(k) incurred any liabilities except in the ordinary course of business and
consistent with past practice which would be required to be disclosed in
financial statements prepared in accordance with generally accepted accounting
principles; (l) permitted or allowed any of its property or assets to be
subjected to any mortgage, deed of trust, pledge, lien, security interest or
other encumbrance of any kind, except those permitted under Section 3.7 ("Title
and Related Matters") hereof, other than any purchase money security interests
incurred in the ordinary course of business; (m) made any capital expenditure or
commitment for additions to property, plant or equipment except in the ordinary
course of business; (n) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets to, or entered into any agreement
or arrangement with any of its Affiliates, officers, directors or stockholder or
any Affiliate or associate of any of the foregoing; (o) made any amendment to or
terminated any agreement which, if not so amended or terminated, would be
required to be disclosed on the VMW Disclosure Schedule; or (p) agreed to take
any action described in this Section 3.6 ("Absence of Certain Changes or
Events") or outside of its ordinary course of business or which would constitute
a breach of any of the representations contained in this Agreement.
3.7 TITLE AND RELATED MATTERS. VMW has good and marketable title to
all the properties, interests in properties and assets, real and personal,
reflected in the VMW Balance Sheet or acquired after the date of the VMW Balance
Sheet (except properties, interests in properties and assets sold or otherwise
disposed of since the date of the VMW
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Balance Sheet in the ordinary course of business), free and clear of all
mortgages, liens, pledges, charges or encumbrances of any kind or character,
except (i) liens for current taxes and other governmental charges not yet due
and payable, (ii) liens of carriers, warehousemen, mechanics and materialmen and
similar liens incurred in the ordinary course of business, and (iii) liens which
in the aggregate do not secure more than Fifty Thousand Dollars ($50,000) in
liabilities. The equipment of VMW necessary to the operation of its business is
in good operating condition and repair. All real or personal property leases to
which VMW is a party are valid, binding, enforceable and effective in accordance
with their respective terms. VMW is not in default under any of such leases and
to the best of VMW's knowledge, no other party is in default under such leases.
There is not under any of such leases any event which, with notice or lapse of
time or both, would constitute a material default by VMW. The VMW Disclosure
Schedule contains a description of all real and personal property leased or
owned by VMW, describing its interest in said property and with respect to real
property a description of each parcel and a summary description of the
buildings, structures and improvements thereon. True and correct copies of VMW's
leases have been provided to IKOS or its representatives.
3.8 PROPRIETARY ASSETS.
(a) Part 3.8(a)(i) of the VMW Disclosure Schedule sets forth,
with respect to each VMW Proprietary Asset registered with any Governmental Body
or for which an application has been filed with any Governmental Body, (i) a
brief description of such Proprietary Asset, and (ii) the names of the
jurisdictions covered by the applicable registration or application. Part
3.8(a)(ii) of the VMW Disclosure Schedule identifies and provides a brief
description of all other VMW Proprietary Assets owned by VMW. Part 3.8(a)(iii)
of the VMW Disclosure Schedule identifies and provides a brief description of
each Proprietary Asset licensed to VMW by any Person (except for any Proprietary
Asset that is licensed to VMW under any third party software license generally
available to the public at a cost of less than Two Thousand Five Hundred Dollars
($2,500), and identifies the license agreement under which such Proprietary
Asset is being licensed to VMW. Except as set forth in Part 3.8(a)(iv) of the
VMW Disclosure Schedule, VMW has good, valid and marketable title to all of the
VMW Proprietary Assets identified in Parts 3.8(a)(i) and 3.8(a)(ii) of the VMW
Disclosure Schedule, free and clear of all liens and other Encumbrances, and has
a valid right to use all Proprietary Assets identified in Part 3.8(a)(iii) of
the VMW Disclosure Schedule. Except as set forth in Part 3.8(a)(v) of the VMW
Disclosure Schedule, VMW is not obligated to make any payment to any Person for
the use of any VMW Proprietary Asset. Except as set forth in Part 3.8(a)(vi) of
the VMW Disclosure Schedule, VMW has not developed jointly with any other Person
any VMW Proprietary Asset with respect to which such other Person has any
rights.
(b) Except as set forth in Part 3.8 of the VMW Disclosure
Schedule, VMW has taken reasonable measures and precautions within its control
which are necessary to protect and maintain the confidentiality and secrecy of
all VMW Proprietary Assets (except VMW Proprietary Assets whose value would be
unimpaired by public disclosure) and otherwise to maintain and protect the value
of all VMW Proprietary Assets. Except as set forth in Part 3.8(b)(i) of the VMW
Disclosure Schedule, VMW has not disclosed or delivered to any Person, or
permitted the disclosure or delivery to any
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Person of the source code, or any portion or aspect of the source code, of any
VMW Product.
(c) None of the VMW Proprietary Assets infringes or conflicts
with any Proprietary Asset owned or used by any other Person. VMW is not
infringing, misappropriating or making any unlawful use of, and VMW has not at
any time infringed, misappropriated or made any unlawful use of, or received any
notice or other communication (in writing or otherwise) of any actual, alleged,
possible or potential infringement, misappropriation or unlawful use of, any
Proprietary Asset owned or used by any other Person. To the best of the
knowledge of VMW, no other Person is infringing, misappropriating or making any
unlawful use of, and no Proprietary Asset owned or used by any other Person
infringes or conflicts with, any VMW Proprietary Asset.
(d) Each VMW Product conforms in all material respects with any
specification, documentation, performance standard, representation or statement
made or provided with respect thereto by or on behalf of VMW. There has not
been any claim by any customer or other Person alleging that any VMW Product
(including each version thereof that has ever been licensed or otherwise made
available by VMW to any Person) does not conform in all material respects with
any specification, documentation, performance standard, representation or
statement made or provided by or on behalf of VMW, and, to the best of the
knowledge of VMW, there is no basis for any such claim.
(e) The VMW Proprietary Assets constitute all the Proprietary
Assets used by VMW to conduct its business in the manner in which such business
has been and is being conducted. VMW has not licensed any of the VMW Proprietary
Assets to any Person on an exclusive basis. VMW has not entered into any
covenant not to compete or contract limiting its ability to exploit fully any of
the VMW Proprietary Assets or to transact business in any market or geographical
area or with any Person.
(f) (i) All current and former employees of VMW have executed and
delivered to VMW an agreement (containing no exceptions to or exclusions from
the scope of its coverage) that is substantially identical to the form of
employment agreement previously delivered to IKOS, and (ii) all current and
former consultants and independent contractors to VMW have executed and
delivered to VMW an agreement (containing no exceptions to or exclusions from
the scope of its coverage) that is substantially identical to the form of
consulting agreement previously delivered to IKOS. Such forms of agreements,
when executed by an employee or contractor, as the case may be, are enforceable
in accordance with the terms thereof and such agreements and/or applicable laws
convey to VMW full right and title to all works created by the employee, while
employed, or by the contractor as to the work undertaken for and delivered to
VMW by such contractor.
(g) To VMW's knowledge, no product liability or warranty claims
which individually or in the aggregate could exceed the reserves therefor on the
VMW Financial Statements have been communicated in writing to or threatened
against VMW.
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3.9 EMPLOYEE BENEFIT PLANS. There is no unfunded prior service cost
with respect to any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, or other employee benefit or fringe
benefit plans, whether formal or informal, maintained by VMW. Each bonus,
deferred compensation, pension, profit-sharing, retirement, stock purchase,
stock option, and other employee benefit or fringe benefit plans, whether formal
or informal, maintained by VMW conforms to all applicable requirements of the
Employees Retirement Income Security Act of 1974. Part 3.9 of the VMW Disclosure
Schedule lists and describes all profit-sharing, bonus, incentive, deferred
compensation, vacation, severance pay, retirement, stock option, group insurance
or other plans (whether written or not) providing employee benefits. Except as
provided in the plans listed in Part 3.9 of the VMW Disclosure Schedule and for
the compensation described in Part 3.17 of the VMW Disclosure Schedule, VMW has
no obligations to provide compensation or benefits to its employees.
3.10 BANK ACCOUNTS. Part 3.10 of the VMW Disclosure Schedule sets
forth the names and locations of all banks, trusts, companies, savings and loan
associations, and other financial institutions at which VMW maintains accounts
of any nature and the names of all persons authorized to draw thereon or make
withdrawals therefrom.
3.11 CONTRACTS.
(a) Except as listed in Part 3.11(a) of the VMW Disclosure
Schedule, VMW has no agreements, contracts or commitments that provide for the
sale, licensing or distribution by VMW of any of its products, technology, know-
how, trademarks or trade names except in the ordinary course of its business.
(b) Except as listed in Part 3.11(b) of the VMW Disclosure
Schedule, VMW has no agreements, contracts or commitments that call for fixed
and/or contingent payments or expenditures by or to VMW of more than Fifty
Thousand Dollars ($50,000).
(c) VMW has not granted to any third party any rights to
reproduce or manufacture (for VMW or for others) any of the VMW Products, nor
has VMW granted to any third party any exclusive rights of any kind with respect
to any of the VMW Products, including, without limitation, territorial
exclusivity or exclusivity with respect to particular versions, implementations
or translations of any of the VMW Products, nor has VMW granted any third party
any right to market any of the VMW Products under any "private label"
arrangements pursuant to which VMW is not identified as the source of such
goods.
(d) VMW has no purchase agreement, contract or commitment that
calls for fixed and/or contingent payments by VMW that are in excess of the
normal, ordinary and usual requirements of business.
(e) There is no outstanding sales contract, commitment or
proposal (including, without limitation, porting and development projects) of
VMW that is
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currently expected to result in any loss (before allocation of overhead and
administrative costs) upon completion or performance thereof.
(f) VMW has no outstanding agreements, contracts or commitments
with officers, employees, agents, consultants, advisors, salesmen, sales
representatives, distributors or dealers that are not cancelable by it on notice
of not longer than thirty (30) days and without liability, penalty or premium.
(g) VMW has no employment, independent contractor or similar
agreement, contract or commitment that is not terminable on no more than thirty
(30) days' notice without penalty or liability of any type, including without
limitation severance or termination pay.
(h) VMW has no currently effective collective bargaining or union
agreements, contracts or commitments.
(i) VMW is not restricted by agreement from carrying on its
business anywhere in the world.
(j) VMW is under no liability or obligation, and no such
outstanding claim has been made, with respect to the return of inventory or
merchandise in the possession of wholesalers, distributors, retailers, or other
customers, except such liabilities, obligations and claims as, in the aggregate,
do not exceed the amount reserved therefor on the VMW Balance Sheet.
(k) VMW has not guaranteed any obligations of other persons or
made any agreements to acquire or guarantee any obligations of other persons.
(l) VMW has no outstanding loan or advance to any person; nor is
it party to any line of credit, standby financing, revolving credit or other
similar financing arrangement of any sort which would permit the borrowing by
VMW of any sum not reflected in the Financial Statements.
(m) All Material contracts, agreements and instruments to which
VMW is a party are valid, binding, in full force and effect, and enforceable by
VMW in accordance with their respective terms, and VMW is not in breach thereof.
No such Material contract, agreement or instrument contains any Material
liquidated-damages, penalty or similar provision. To the best of VMW's
knowledge, no party to any such Material contract, agreement or instrument
intends to cancel, withdraw, modify or amend such contract, agreement or
arrangement.
(n) The VMW Disclosure Schedule also lists each vendor who
manufactures for or supplies to VMW any Material product or component or is the
sole source for any product or component.
(o) With respect to any contracts which VMW has with an agency or
instrumentality of the United States Government, VMW has taken all necessary
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measures to comply with the terms and conditions of those contracts, including
without limitation, those provisions of the Federal Acquisition Regulations and
its supplements, 48 C.F.R. Chapter 1 et seq., which are incorporated into such
-- ---
contracts and which may require the implementation of certain accounting
principles and procedures, the submission of cost or pricing data, the legending
of technical data and/or computer software provided to the Government under the
contracts, and compliance with various socio-economic policies and
certifications. VMW does not know of any asserted or unasserted claims by the
Government, nor has VMW any reason to believe that the Government could assert a
claim, based on VMW's failure to comply with any terms or conditions of a
contract with an agency or instrumentality of the Government.
3.12 ORDERS, COMMITMENTS AND RETURNS. All accepted and unfilled
orders entered into by VMW for the sale, license, or lease or other disposition
by VMW of its products, and all agreements, contracts, or commitments for the
purchase of supplies, were made in the ordinary course of business. No
outstanding purchase or outstanding lease commitment of VMW is in excess of the
normal, ordinary and usual requirements of its business or was made at any price
(on both a per unit and aggregate basis) materially in excess of the current
market price at the time made, or contains terms and conditions Materially more
onerous to VMW than those usual and customary in the industry.
3.13 COMPLIANCE WITH LAW. VMW is in compliance in all Material
respects with all applicable laws and regulations. Neither VMW nor, to the best
of VMW's knowledge, any of its employees has directly or indirectly paid or
delivered any fee, commission or other sum of money or item of property, however
characterized, to any finder, agent, government official or other party in the
United States or any other country, that was or is in violation of any federal,
state, or local statute or law or of any statute or law of any other country
having jurisdiction. VMW has not participated directly or indirectly in any
boycotts or other similar practices affecting any of its customers. VMW has
complied at all times with any and all applicable federal, state and foreign
laws, rules, regulations, proclamations and orders relating to the importation
or exportation of its products.
3.14 LABOR DIFFICULTIES.
(a) VMW is not engaged in any unfair labor practice and is not in
violation of any applicable laws respecting employment and employment practices,
terms and conditions of employment, and wages and hours.
(b) There is no unfair labor practice complaint against VMW actually
pending or threatened before the National Labor Relations Board.
(c) There is no strike, labor dispute, slowdown, or stoppage actually
pending or threatened against VMW.
(d) No union representation question exists respecting the employees
of VMW and to the best of VMW's knowledge no union organizing activities are
taking place.
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(e) No grievance that might have an adverse effect on VMW or the
conduct of its business, nor any arbitration proceeding arising out of or under
any collective bargaining agreement is pending and no claims therefor exist.
(f) No collective bargaining agreement that is binding on VMW
restricts it from relocating or closing any of its operations.
(g) VMW has not experienced any Material work stoppage or other
Material labor difficulty.
3.15 TRADE REGULATION AND PRACTICES. VMW has not terminated its
relationship with or refused to ship VMW Products to any third party which in
the twelve (12) month period prior to the date of this Agreement had been a
dealer, distributor, OEM, third party marketing entity or customer of VMW. All
of the prices charged by VMW in connection with the marketing or sale of any
products or services have been in compliance with all applicable laws and
regulations. No claims have been communicated or threatened against VMW with
respect to wrongful termination of any dealer, distributor or any other
marketing entity, discriminatory pricing, price fixing, unfair competition,
false advertising, or any other violation of any laws or regulations relating to
anti-competitive practices or unfair trade practices of any kind, and no
specific situation, set of facts, or occurrence provides any basis for any such
claim.
3.16 INSIDER TRANSACTIONS. No Affiliate of VMW has any beneficial
interest in (i) any equipment, Proprietary Asset or other property used in
connection with or pertaining to the business of VMW, or (ii) any creditor,
supplier, customer, manufacturer, agent, representative, or distributor of
products of VMW; provided, however, that no such Affiliate or other person shall
be deemed to have such an interest solely by virtue of the ownership of less
than 1% of the outstanding stock or debt securities of any publicly-held
company, the stock or debt securities of which are traded on a recognized stock
exchange or quoted on the National Association of Securities Dealers Automated
Quotation System or the New York Stock Exchange.
3.17 EMPLOYEES, INDEPENDENT CONTRACTORS AND CONSULTANTS. The VMW
Disclosure Schedule lists and describes all currently effective consulting,
independent contractor and/or employment agreements and other Material
agreements concluded with individual employees, independent contractors or
consultants to which VMW is a party. All salaries and wages paid by VMW are in
compliance with applicable federal, state and local laws. Part 3.17 of the VMW
Disclosure Schedule lists the names of all VMW employees and their annual rate
of compensation, including bonuses and other cash payments of any kind. VMW's
aggregate accrued vacation and severance pay as of April 30, 1996 is as set
forth on the VMW Disclosure Schedule. VMW is not aware of any VMW employees who
intend to terminate their employment with IKOS after the Merger.
3.18 INSURANCE. The VMW Disclosure Schedule contains a list of the
principal policies of fire, liability and other forms of insurance held by VMW.
VMW has not done anything, either by way of action or inaction, that might
invalidate such policies in whole or in part.
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3.19 LITIGATION. There are no suits, actions or proceedings pending
or, to the best of VMW's knowledge, threatened against or affecting VMW or which
questions or challenges the validity of this Agreement. There is no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against VMW. VMW
is not, and has received no notice that it is, in default under or in breach or
violation of any contract, commitment or restriction to which VMW is a party or
to which it or any of its properties is bound. To the best of VMW's knowledge,
no other party is in default under or in breach or violation of, nor is there
any valid basis for any claim of default by any other party under or any breach
or violation by any other party of, any Material contract, commitment, or
restriction to which VMW is bound or by which any of its properties is bound.
3.20 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS. All Material
licenses, franchises, permits and other governmental authorizations held by VMW
are valid and sufficient for the business presently carried on by VMW. The
business of VMW is not being conducted in violation of any law, ordinance or
regulation of any governmental entity, except for violations which either singly
or in the aggregate do not and will not result in liability or penalties in
excess of Fifty Thousand Dollars ($50,000).
3.21 CORPORATE MINUTES, ETC. The corporate minute books, stock
certificate books, stock registers and other corporate records of VMW are
complete and accurate in all Material respects, and the signatures appearing on
all documents contained therein are the true signatures of the persons
purporting to have signed the same. All actions reflected in such books and
records were duly and validly taken in compliance with the laws of the
applicable jurisdiction. True and correct copies of such records have been
provided to IKOS or its representatives.
3.22 SUBSIDIARIES. VMW has no subsidiaries except as listed in Part
3.22 of the VMW Disclosure Schedule. The term "VMW" when used in these
representations shall include its subsidiaries, if any. VMW does not own or
control (directly or indirectly) any capital stock, bonds or other securities
of, and does not have any proprietary interest in, any other corporation,
general or limited partnership, firm, association or business organization,
entity or enterprise, and VMW does not control (directly or indirectly) the
management or policies of any other corporation, partnership, firm, association
or business organization, entity or enterprise.
3.23 COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS.
(a) As of the date hereof, to the knowledge of VMW, no underground
storage tanks are present under any property that VMW or any of its subsidiaries
has at any time owned, operated, occupied or leased. As of the date
hereof, except as set forth in the VMW Disclosure Schedule, no Material amount
of any substance that has been designated by any Governmental Body or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
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waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), are present as a result of the actions of VMW, or any
actions of any third party or otherwise, in, on or under any property, including
the land and the improvements, ground water and surface water, that VMW has at
any time owned, operated, occupied or leased.
(b) At no time has VMW transported, stored, used, manufactured,
disposed of, released or exposed its employees or others to Hazardous Materials
in violation of any law in effect on or before the Closing Date, nor has VMW
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (collectively, "Hazardous Materials Activities") in violation
of any rule, regulation, treaty or statute promulgated by any Governmental Body
to prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) VMW currently holds all environmental approvals, permits,
licenses, clearances and consents (the "Environmental Permits") necessary for
the conduct of its Hazardous Material Activities and other businesses of VMW as
such activities and businesses are currently being conducted, the absence of
which would be reasonably likely to result in fines to VMW in excess of Ten
Thousand Dollars ($10,000).
(d) No action, proceeding, revocation proceeding, amendment procedure,
writ, injunction or claim is pending or, to the knowledge of VMW, threatened
concerning any Environmental Permit or any Hazardous Materials Activity of VMW.
VMW is not aware of any fact or circumstance which could involve VMW in any
environmental litigation or impose upon VMW any environmental liability which
would be reasonably likely to exceed Ten Thousand Dollars ($10,000).
3.24 CORPORATE DOCUMENTS AND CONTRACTS. VMW has furnished to IKOS for
its examination: (i) copies of its Certificate of Incorporation, as amended, and
Bylaws, as amended; (ii) its Minute Book containing all records required to be
set forth of all proceedings, consents, actions, and meetings of the
stockholders, the board of directors and any committees thereof; (iii) all
permits, orders, and consents issued by any regulatory agency with respect to
VMW, or any securities of VMW, and all applications for such permits, orders,
and consents; and (iv) the stock transfer books of VMW setting forth all
transfers of any capital stock. VMW has delivered to IKOS and/or IKOS's counsel
true and correct copies of all agreements or other documents listed or referred
to in the VMW Disclosure Schedule.
3.25 NO BROKERS. Neither VMW nor to the best of VMW's knowledge any
VMW stockholder, is obligated for the payment of fees or expenses of any broker
or finder in connection with the origin, negotiation or execution of this
Agreement or in connection with any transaction contemplated hereby or thereby.
3.26 DISCLOSURE. No statements by VMW contained in this Agreement and
any other Transaction Document or any written statement or certificate furnished
or to be furnished pursuant hereto or in connection with the transactions
contemplated hereby and thereby (when read together) contains any untrue
statement of a Material fact
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or omits to state a Material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made.
4. REPRESENTATIONS AND WARRANTIES OF IKOS AND SUB.
Except as otherwise set forth in the "IKOS Disclosure Schedule" delivered as of
the date hereof ("IKOS Disclosure Schedule"), IKOS and Sub jointly and severally
represent and warrant to VMW as set forth below. No fact or circumstance
disclosed to VMW shall constitute an exception to these representations and
warranties unless such fact or circumstance is set forth in the IKOS Disclosure
Schedule with specific reference to the representation as to which it is an
exception.
4.1 ORGANIZATION AND GOOD STANDING. IKOS and Sub are corporations
duly organized, validly existing and in good standing under the laws of the
States of California and Delaware, respectively, and have full power and
authority to carry on their businesses as now conducted. IKOS and Sub are
qualified as foreign corporations in any jurisdiction in which a failure to
qualify would have a material adverse effect on the operations or financial
condition of IKOS and/or Sub.
4.2 POWER, AUTHORIZATION AND VALIDITY.
(a) IKOS and Sub have the right, power, legal capacity and authority
to enter into and perform their respective obligations under this Agreement and
other Transaction Documents.
(b) The execution, delivery and performance of this Agreement and the
Certificate of Merger have been, or will have been prior to the Closing, duly
and validly approved and authorized by the Boards of Directors of IKOS and Sub
and the stockholder of Sub. No authorization or approval, governmental or
otherwise, is necessary in order to enable IKOS and Sub to enter into and to
perform the applicable terms of this Agreement or the Certificate of Merger.
(c) This Agreement and any agreements which are exhibits to this
Agreement are the valid and binding obligations of IKOS and Sub enforceable in
accordance with their terms.
4.3 NO VIOLATION OF EXISTING AGREEMENTS. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will conflict with, or result in a material breach or violation of, any
provision of IKOS's Certificate of Incorporation or Sub's Certificate of
Incorporation, or their respective Bylaws, as currently in effect, any
instrument or contract to which IKOS or Sub is a party or by which any such
party is bound, or any federal, state or local judgment, writ, decree, order,
statute, rule or regulation applicable to any such party. Neither the execution
and delivery of this Agreement, nor any Transaction Document, nor the
consummation of the transactions contemplated hereby or thereby will directly
have a material adverse effect on the operations, assets, financial condition or
prospects of IKOS.
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4.4 COMPLIANCE WITH OTHER INSTRUMENTS AND LAWS. IKOS is not in
violation of any provisions of its Certificate of Incorporation or Bylaws as
currently in effect or in effect at the Closing, or any federal, state or local
judgment, writ, decree, or order applicable to IKOS or any instrument or
contract to which IKOS is a party or to which its assets are subject. Sub is
not in violation of any provision of its Certificate of Incorporation or Bylaws
as currently in effect or in effect at the Closing, or any federal, state or
local judgment, writ, decree, or order applicable to Sub. The operations of
IKOS have not violated any federal, state or local laws, regulations or orders
with which failure to comply would have a material adverse effect on the
operations, assets, financial conditions or prospects of IKOS.
4.5 FINANCIAL CONDITION. IKOS's financial condition is adequate for
IKOS to perform its obligations under the Agreement.
4.6 NO BROKERS. Neither IKOS nor Sub is obligated for the payment of
fees or expenses of any broker or finder in connection with the origin,
negotiation or execution of this Agreement or in connection with any transaction
contemplated hereby or thereby.
4.7 DISCLOSURE. No statements by IKOS or Sub contained in this
Agreement and any other Transaction Document or any written statement or
certificate furnished or to be furnished pursuant hereto or in connection with
the transactions contemplated hereby and thereby (when read together) contains
any untrue statement of a Material fact or omits to state a Material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
4.8 VALID ISSUANCE OF IKOS COMMON STOCK. The IKOS Common Stock, when
issued in compliance with the provisions of this Agreement, will be validly
issued, fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the IKOS Common Stock may be subject to
restrictions on transfer under state and/or federal securities laws or otherwise
required by such laws at the time a transfer is proposed.
5. PRECLOSING COVENANTS OF VMW.
5.1 ADVICE OF CHANGES. VMW will promptly advise IKOS in writing (i)
of any event occurring subsequent to the date of this Agreement which would
render any representation or warranty of VMW contained in this Agreement, if
made on or as of the date of such event or the Closing Date, untrue or
inaccurate in any material respect and (ii) of any material adverse change in
VMW's business, taken as a whole.
5.2 CONDUCT OF BUSINESS. Until the Closing, VMW will continue to
conduct its business and maintain its business relationships in the ordinary and
usual course and will not, without the prior written consent of IKOS:
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(a) borrow any money which borrowings exceed in the aggregate $50,000
other than borrowings previously advanced by IKOS to VMW in connection with the
transactions contemplated hereby;
(b) incur any liability other than in the ordinary and usual course of
business or in connection with the performance or consummation of this
Agreement;
(c) encumber or permit to be encumbered any of its assets except
in the ordinary course of its business;
(d) dispose of any of its assets, except inventory in the regular
and ordinary course of business;
(e) enter into any lease or contract for the purchase or sale of any
property, real or personal except in the ordinary course of business;
(f) fail to maintain its equipment and other assets in good working
condition and repair according to the standards it has maintained up to the date
of this Agreement, subject only to ordinary wear and tear;
(g) pay any bonus, increased salary, or special remuneration to any
officer or employee, including any amounts for accrued but unpaid salary or
bonuses;
(h) adopt or change any accounting methods;
(i) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital, or redeem or otherwise acquire any of its
capital stock;
(j) amend or terminate any Material contract, agreement or license to
which it is a party except in the ordinary course of business;
(k) enter into any Material contract;
(l) loan any Material amount to any person or entity, or guaranty or
act as a surety for any obligation;
(m) waive or release any Material right or claim, except in the
ordinary course of business;
(n) issue or sell any shares of its capital stock of any class or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock or amend the terms of any agreement regarding the
foregoing;
(o) split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization affecting the number of outstanding
shares of its capital stock of any class or affecting any other of its
securities;
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(p) merge, consolidate or reorganize with any entity;
(q) amend its Certificate of Incorporation or Bylaws;
(r) make or change any election, change any annual accounting period,
file any tax return or amended tax return, enter into any closing agreement,
settle any tax claim or assessment relating to VMW, surrender any right to claim
refund of taxes, consent to any extension or waiver of the limitation period
applicable to any tax claim or assessment relating to VMW, or take any other
action or omit to take any action, if any such election, adoption, change,
amendment, agreement, settlement, surrender, consent or other action or omission
would have the effect of increasing the tax liability of VMW or IKOS; or
(s) agree to do any of the things described in the preceding clauses
of this Section 5.2.
5.3 RISK OF LOSS. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, all risk of loss, damage or
destruction to VMW's assets shall be borne by VMW, and the merger terms
described in Section 2 ("Plan of Reorganization") shall, in case of any such
loss, damage or destruction, be reduced as the parties may agree, or this
Agreement shall be terminated in accordance with Section 11 ("Termination of
Agreement").
5.4 ACCESS TO INFORMATION. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, VMW shall allow IKOS and its
agents free access upon reasonable notice and during normal working hours to its
files, books, records, and offices, including, without limitation, any and all
information relating to taxes, commitments, contracts, leases, licenses, and
personal property and financial condition. Until the Closing, VMW shall cause
its accountants to cooperate with IKOS and its agents in making available all
financial information requested, including without limitation the right to
examine all working papers pertaining to all financial statements prepared or
audited by such accountants.
5.5 REGULATORY APPROVALS. Prior to the Closing, VMW shall execute
and file, or join in the execution and filing, of any application or other
document which may be necessary in order to obtain the authorization, approval
or consent of any Governmental Body, federal, state or local, which may be
reasonably required, or which IKOS may reasonably request, in connection with
the consummation of the transactions contemplated by this Agreement. Such
persons and entities shall use their best efforts to obtain all such
authorizations, approvals and consents.
5.6 SATISFACTION OF CONDITIONS PRECEDENT. VMW will use its best
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Section 10 ("Conditions to IKOS's Obligations"), and VMW will
use its best efforts to cause the transactions contemplated by this Agreement to
be consummated, and, without limiting the generality of the foregoing, to obtain
all consents and authorizations of third parties and to make all filings with,
and give all notices to, third parties which may be
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necessary or reasonably required on its part in order to effect the transactions
contemplated hereby.
5.7 STOCKHOLDER VOTE. Prior to the Closing, whether by special
meeting or written consent of its stockholders, VMW will submit this Agreement
and related matters to its stockholders for consideration and approval, and the
Board of Directors of VMW will recommend such approval to the VMW stockholders.
5.8 IRREVOCABLE PROXIES. VMW shall use its best efforts, on behalf
of IKOS and pursuant to the request of IKOS, to cause holders of more than 51%
of the sum of (a) all shares of VMW Common stock issued and outstanding and (b)
all shares of VMW Preferred Stock issued and outstanding to execute and deliver
to IKOS an Irrevocable Proxy substantially in the form of Exhibit C attached
---------
hereto concurrently with the execution of this Agreement.
5.9 EMPLOYMENT ARRANGEMENTS.
(a) At Closing, IKOS shall provide employment to all employees of VMW
at salaries and in positions similar to those held by such employees at the time
of this Agreement with benefits substantially similar to those provided by IKOS
generally to IKOS employees employed in similar positions.
(b) At Closing, the Key Employees shall each enter into a noncompete
and nonsolicitation agreement with IKOS with a term of three years from the
Closing Date, substantially in the form attached to this Agreement as Exhibit D
---------
("Noncompete and Nonsolicitation Agreement") and such other terms as are
mutually agreeable to IKOS and such employees.
(c) Prior to the Closing, any obligation of VMW to issue stock,
warrants or options which have been offered or promised shall have been
fulfilled to the mutual satisfaction of IKOS and VMW.
(d) Any stock, warrants or options issued under sections 5.9 shall be
included as "fully diluted" shares in the calculation of the VMW Share Price.
5.10 NONACCREDITED STOCKHOLDERS. Prior to the Closing, VMW shall not
take any action, including the granting of employee stock options, that could
cause the number of VMW Stockholders who are not "accredited investors" pursuant
to Regulation D promulgated under the Securities Act of 1933, as amended, to
increase to more than 35 during the term of this Agreement.
6. PRECLOSING AND POSTCLOSING COVENANTS OF IKOS AND SUB.
6.1 ADVICE OF CHANGES. IKOS and Sub will promptly advise VMW in
writing of any event occurring subsequent to the date of this Agreement which
would render any representation or warranty of IKOS or Sub contained in this
Agreement, if
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made on or as of the date of such event or the Closing Date, untrue or
inaccurate in any material respect.
6.2 REGULATORY APPROVALS. Prior to the Closing, IKOS and Sub shall
execute and file, or join in the execution and filing, of any application or
other document which may be necessary in order to obtain the authorization,
approval or consent of any governmental body, federal, state or local, which may
be reasonably required, or which VMW may reasonably request, in connection with
the consummation of the transactions contemplated by this Agreement. Such
persons and entities shall use their best efforts to obtain all such
authorizations, approvals and consents.
6.3 SATISFACTION OF CONDITIONS PRECEDENT. IKOS will use its best
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Section 9 ("Conditions to VMW's Obligations"), and IKOS will
use its best efforts to cause the transactions contemplated by this Agreement to
be consummated on or before May 31, 1996, and, without limiting the generality
of the foregoing, to obtain all consents and authorizations of third parties and
to make all filings with, and give all notices to, third parties which may be
necessary or reasonably required on its part in order to effect the transactions
contemplated hereby.
6.4 DIRECTORS' AND OFFICERS' INDEMNIFICATION. IKOS and Sub hereby
agree that all rights to indemnification existing in favor, and all limitations
on the personal liability, of any director, officer or other employee of VMW
provided for in VMW's certification of incorporation or by-laws as in effect as
of the date hereof with respect to matters occurring prior to the Effective Date
shall survive the Merger and shall continue in full force and effect for a
period of not less than six (6) years from the Closing Date; provided, however,
-------- -------
that all rights to indemnification in respect of any claim asserted or made
within such period shall continue until the disposition of such claim. In the
event IKOS or Sub or any of its successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to any person,
then, and in each such case, to the extent necessary, proper provision shall be
made so that the successors and assigns of Buyer or the Surviving Corporation,
as the case may be, assume the obligations set forth in this Section 6.4.
7. MUTUAL COVENANTS.
7.1 CONFIDENTIALITY. Each party acknowledges that in the course of
the performance of this Agreement, it may obtain the Confidential Information of
the other party. The Receiving Party (as defined in Section 1.7 ("Confidential
Information")) shall, at all times, both during the term of this Agreement and
thereafter, keep in confidence and trust all of the Disclosing Party's (as
defined in Section 1.7 ("Confidential Information")) Confidential Information
received by it. The Receiving Party shall not use the Confidential Information
of the Disclosing Party other than as expressly permitted under the terms of
this Agreement or by a separate written agreement. The Receiving Party shall
take all reasonable steps to prevent unauthorized disclosure or use of the
Disclosing Party's Confidential Information and to prevent it from falling into
the public domain or into the
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possession of unauthorized persons. The Receiving Party shall not disclose
Confidential Information of the Disclosing Party to any person or entity other
than its officers, employees, consultants and permitted sublicensees who need
access to such Confidential Information in order to effect the intent of this
Agreement and who have entered into confidentiality agreements with such
person's employer which protects the Confidential Information of the Disclosing
Party. The Receiving Party shall promptly give notice to the Disclosing Party of
any unauthorized use or disclosure of Disclosing Party's Confidential
Information. The Receiving Party agrees to assist the Disclosing Party to remedy
such unauthorized use or disclosure of its Confidential Information, which
remedies shall include injunctive relief without the necessity of posting a bond
or proving damages. These obligations shall not apply to the extent that
Confidential Information includes information which:
(a) is already known to the Receiving Party at the time of disclosure,
which knowledge the Receiving Party shall have the burden of proving;
(b) is, or, through no act or failure to act of the Receiving Party,
becomes publicly known;
(c) is received by the Receiving Party from a third party without
restriction on disclosure;
(d) is independently developed by the Receiving Party without
reference to the Confidential Information of the Disclosing Party, which
independent development the Receiving Party will have the burden of proving;
(e) is approved for release by written authorization of the Disclosing
Party; or
(f) is required to be disclosed by a government agency to further the
objectives of this Agreement or by a proper order of a court of competent
jurisdiction; provided, however that the Receiving Party will use its best
efforts to minimize such disclosure and will consult with and assist the
Disclosing Party in obtaining a protective order prior to such disclosure.
7.2 EXCLUSIVITY. Until the earlier of the Closing Date and April 30,
1996, VMW agrees that it will not (and that it will use best efforts to assure
that its employees, agents and affiliates do not on its behalf) discuss or enter
any agreement concerning the sale or acquisition of VMW, its stock (including by
means of any public offering thereof, but excluding issuance of stock and
options to employees in the ordinary course of business consistent with past
practices) or a substantial part of its assets with any party other than IKOS,
and that any such discussions presently in progress will be terminated or
suspended during that period. VMW represents and warrants that it has the legal
right to terminate or suspend any such pending negotiations and agrees to
indemnify IKOS, its representatives and agents from and against any claims by
any party to such negotiations based upon or arising out of the discussion or
any consummation of the Merger.
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7.3 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
7.4 FORM S-8. As soon as practicable after the Effective Time, and
not more than 20 business days thereafter, IKOS shall file a registration
statement on Form S-8 (or any successor or other appropriate forms), or another
appropriate form with respect to the shares of VMW Common Stock subject to
Options assumed by IKOS and shall use its best efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such options remain outstanding.
7.5 NASDAQ LISTING. Upon official notice of issuance, IKOS agrees to
authorize for listing on the Nasdaq National Market the IKOS shares issuable in
connection with the Merger or upon exercise of IKOS options granted in
connection with the Merger.
8. THE CLOSING.
8.1 MERGER.
(a) On the date of the Closing, but not prior to the Closing, the
Certificate of Merger shall be filed with the office of the Secretary of State
of the State of Delaware and the merger of Sub with and into VMW shall be
consummated.
(b) At the Closing, IKOS shall deliver to the VMW Stockholders such
consideration as set forth on Exhibit B (the "Merger Consideration Schedule");
---------
provided, however, that such amount made available by IKOS to all VMW
Stockholders, option holders or warrant holders shall not exceed the Aggregate
Consideration.
8.2 ADDITIONAL DOCUMENTS.
(a) At any time and from time to time at or after the Closing, the
parties shall at the request of the other party execute and deliver or cause to
be executed and delivered all such assignments, consents and other documents and
take or cause to be taken all such other actions as either party may reasonably
deem necessary or desirable, in order to more fully and effectively carry out
the intents and purposes of this Agreement.
(b) VMW shall execute and deliver to IKOS a statement meeting the
requirements of Treasury Regulation Section 1.897-2(h)(2) stating that interests
in VMW are not United States real property interests.
9. CONDITIONS TO VMW'S OBLIGATIONS.
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VMW's obligations hereunder are subject to the fulfillment or
satisfaction on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by VMW, but only in a writing signed by VMW):
9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of IKOS and Sub set forth in Section 4 ("Representations and
Warranties of IKOS and Sub") shall be true on and as of the Closing with the
same force and effect as if they had been made at the Closing, and VMW shall
receive a certificate to such effect from an executive officer of IKOS and Sub,
respectively.
9.2 COVENANTS. IKOS and Sub shall have performed and complied with
all of their covenants contained in Sections 6 ("Preclosing and Postclosing
Covenants of IKOS and Sub") and 7 ("Mutual Covenants") on or before the
Closing, and IKOS and Sub shall each deliver to VMW a certificate executed by an
executive officer of each, respectively, at Closing stating that such condition
has been satisfied.
9.3 NO LITIGATION. No litigation or proceeding shall be threatened
or pending against IKOS and Sub with the purpose or with the probable effect of
enjoining or preventing the consummation of any of the transactions contemplated
by this Agreement, and VMW shall receive a certificate to such effect signed by
an executive officer and Sub, respectively.
9.4 AUTHORIZATIONS. VMW shall have received from IKOS and Sub
written evidence that the execution, delivery and performance of IKOS and Sub's
obligations under this Agreement and the Certificate of Merger have been duly
and validly approved and authorized by the Board of Directors of IKOS and Sub,
respectively, and the stockholder of Sub.
9.5 NO ADVERSE DEVELOPMENT. There shall be no order, decree, or
ruling by any court or Governmental Body or threat thereof or any other fact or
circumstance, which might prohibit or render illegal or have a material, adverse
effect on the business, prospects, liabilities, income, property, assets or
operations of IKOS and Sub subsequent to the Closing. IKOS and Sub shall not
have sustained a loss, whether or not insured, by reason of physical damage
caused by fire, flood or earthquake, accident or other calamity which materially
affects the value of its assets or its ability to carry on its business as
proposed to be conducted, and which, in the judgment of VMW, renders it
inadvisable to proceed with the Closing. There shall have been no other event
which, in the reasonable judgment of VMW, has a material and adverse effect on
IKOS's assets, business, liabilities, income, property, prospects or operations
subsequent to the Closing (other than cancellation of, or threatened
cancellations of, OEM agreements resulting from, and after, the disclosure of
this Agreement to such OEMs).
9.6 GOVERNMENT CONSENTS. There shall have been obtained at or prior
to the date of Closing such permits or authorizations, and there shall have been
taken such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken, including, but not limited to, compliance with applicable
state and federal securities laws.
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9.7 FEDERAL AND STATE SECURITIES LAWS. IKOS shall have complied with
all applicable federal and state securities laws.
9.8 IKOS CERTIFICATE. IKOS shall deliver a certificate at closing
certifying that it has no knowledge of any information limiting or otherwise
affecting the representations, warranties, covenants and obligations of VMW
other than that included in the VMW Disclosure Schedule.
9.9 OPINION OF IKOS'S COUNSEL. VMW shall have received from Gray
Cary Ware & Freidenrich, the counsel to IKOS, an opinion satisfactory to VMW in
form and substance.
9.10 REGISTRATION RIGHTS AGREEMENT. IKOS and VMW shall have entered
into a Registration Rights Agreement in the form attached hereto as Exhibit E.
---------
10. CONDITIONS TO IKOS AND SUB'S OBLIGATIONS.
The obligations of IKOS and Sub hereunder are subject to the
fulfillment or satisfaction on, and as of the Closing, of each of the following
conditions (any one or more of which may be waived by IKOS, but only in a
writing signed by IKOS). At the Closing IKOS shall have received a certificate
executed by the President and Chief Financial Officer of VMW stating that the
conditions in Sections 10.1 ("Accuracy of Representations and Warranties"), 10.2
("Covenants"), 10.3 ("No Litigation") and 10.4 ("Authorizations") have been
satisfied.
10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of VMW contained in Section 3 ("Representations and Warranties
of VMW") shall be true on and as of the Closing with the same force and effect
as if they had been made at the Closing.
10.2 COVENANTS. VMW shall have performed and complied with all of its
covenants contained in Sections 5 ("Preclosing Covenants of VMW") and 7
(Mutual Covenants) on or before the Closing.
10.3 NO LITIGATION. On and as of the Closing, no litigation or
proceeding shall be threatened or pending against VMW for the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, or which would have a material
adverse effect on the business, liabilities, income, property, operations or
prospects of VMW subsequent to the Closing.
10.4 AUTHORIZATIONS. IKOS shall have received from VMW written
evidence that (i) the execution, delivery and performance of this Agreement and
the Certificate of Merger have been duly and validly approved and authorized by
its Board of Directors and by the stockholders of VMW, and (ii) stockholders of
VMW holding no more than ten percent (10%) of the outstanding shares of VMW
Common Stock have, or might be able to perfect, dissenters' rights in connection
with the Merger.
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10.5 NO ADVERSE DEVELOPMENT. There shall be no order, decree, or
ruling by any court or Governmental Body or threat thereof or any other fact or
circumstance, which might prohibit or render illegal or have a material, adverse
effect on the business, prospects, liabilities, income, property, assets or
operations of VMW subsequent to the Closing. VMW shall not have sustained a
loss, whether or not insured, by reason of physical damage caused by fire, flood
or earthquake, accident or other calamity which materially affects the value of
its assets or its ability to carry on its business as proposed to be conducted,
and which, in the judgment of IKOS, renders it inadvisable to proceed with the
Closing. There shall have been no other event which, in the reasonable judgment
of IKOS, has a material and adverse effect on VMW's assets business,
liabilities, income, property, assets, prospects or operations subsequent to the
Closing (other than cancellation of, or threatened cancellations of, OEM
agreements resulting from, and after, the disclosure of this Agreement to such
OEMs).
10.6 REQUIRED CONSENTS. IKOS shall have received all written
consents, assignments, waivers, authorizations or other certificates reasonably
deemed necessary by IKOS's legal counsel to provide for the continuation in full
force and effect of any and all contracts and leases of VMW.
10.7 OPINION OF VMW'S COUNSEL. IKOS shall have received from Sullivan
& Worcester LLP, counsel to VMW, an opinion satisfactory to IKOS in form and
substance.
10.8 FAIRNESS OPINION OF NEEDHAM & COMPANY, INC. IKOS shall have
received from Needham & Company, Inc., investment bankers to IKOS, an opinion
satisfactory to IKOS in form and substance.
10.9 NON-COMPETE AND NON-SOLICITATION AGREEMENTS. The non-compete and
non-solicitation agreements specified in Section 5.9(b) ("Employment
Arrangements") shall have been executed by IKOS, the Key Employees and certain
other designated employees.
10.10 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been approved and adopted by the holders of at least ninety percent (90%) of the
outstanding shares of VMW Common Stock and VMW Preferred Stock (on an as-
converted basis).
10.11 EMPLOYMENT WITH IKOS. IKOS shall be reasonably satisfied that
substantially all current employees of VMW have accepted or will accept
employment with the Surviving Corporation.
10.12 GOVERNMENT CONSENTS. There shall have been obtained at or
prior to the date of Closing such permits or authorizations and there shall have
been taken such other action, as may be required by any regulatory authority
having jurisdiction over the parties and the subject matter and the actions
herein proposed to be taken, including, but not limited to, compliance with
applicable state and federal securities laws.
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10.13 WAIVER OF OPTION ACCELERATION. Each holder of a VMW Option
(other than Allen H. Michels and certain holders of non-qualified options to
purchase VMW Stock, namely Stephen A. Ward, Nanette Collins, Henry Crouse,
Gordon Bell, Glen Miranker, Anant Agrawal, Fred Weber, John Hennessey, Suhas
Patel and Thomas Minot whose VMW Options shall fully vest upon consummation of
the Merger in accordance with their respective terms) shall have waived in
writing the full acceleration of the holder's VMW Option which otherwise would
have occurred as a result of the Merger. In addition, it is agreed that with
respect to an aggregate of 74,155 unvested shares held by certain VMW
Stockholders and subject of a certain Agreement Among Certain Shareholders
Relating to the Acquisition of Virtual Machine Works, Inc., the full
acceleration as a result of the Merger shall not be waived.
10.14 INVESTMENT REPRESENTATIONS. IKOS shall have received a signed
Investor Representation Letter (each an "Investor Representation Letter") in
substantially the form attached hereto as Exhibit F from each person who is to
---------
receive IKOS Common Stock in connection with the Merger.
10.15 FORGIVENESS OR REPAYMENT OF CERTAIN LOANS. VMW shall have
secured forgiveness, evidenced in writing, or repaid any funds advanced by
certain VMW Preferred Stockholders in bridge financings pursuant to notes dated
as of December 20, 1995 and February 9, 1996 in the aggregate amount of $497,884
and which notes accrue interest at the rate of nine percent (9%) per annum.
10.16 EXERCISE OF WARRANTS. The Warrants shall have been exercised
or canceled prior to the Effective Time of the Merger.
11. TERMINATION OF AGREEMENT.
11.1 MUTUAL AGREEMENT. This Agreement may be terminated at any time
prior to the Closing by the mutual written consent of each of the parties
hereto.
11.2 FAILURE TO FULFILL CONDITIONS. VMW may terminate this Agreement
if the Merger shall not have been consummated by May 31, 1996, and either IKOS
or VMW may terminate this Agreement if the Merger has not been consummated by
May 31, 1996 (provided that the right to terminate this Agreement under this
Section 11.2 shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of or resulted in the failure
of the Merger to occur on or before such date).
Any termination of this Agreement under this Section 11.2 shall be
effective by the delivery of notice of the terminating party to the other
parties hereto.
11.3 NO LIABILITY. Any termination of this Agreement pursuant to this
Section 11 ("Termination of Agreement") shall be without further obligation or
liability upon any party in favor of any other party hereto.
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11.4 EFFECT OF TERMINATION. The termination of the Agreement pursuant
to this Section 11 ("Termination of Agreement") shall terminate all Sections
hereof other than Section 7.1 ("Confidentiality").
12. INDEMNIFICATION AND ESCROW.
12.1 SURVIVAL OF REPRESENTATIONS.
(a) The representations and warranties made by VMW (including the
representations and warranties set forth in Section 3 ("Representations
and Warranties of VMW") hereof and the representations and warranties set forth
in any certificate delivered by VMW in connection with this Agreement) shall
survive the Closing and shall remain in full force and effect and shall survive
until the end of the Indemnification Period and shall survive thereafter only
with respect to any claims made prior to the end of the Indemnification Period.
The representations and warranties made by IKOS and Sub shall survive the
Closing and shall remain in full force and effect and shall survive until the
end of the Indemnification Period.
(b) The representations, warranties, covenants and obligations of VMW,
and the rights and remedies that may be exercised by the Indemnitees (as defined
herein), shall not be limited or otherwise affected by or as a result of any
information furnished to, or any investigation made by or knowledge of, any of
the Indemnitees or any of their Representatives. IKOS shall deliver a
certificate at closing certifying that it has no knowledge of any information
limiting or otherwise affecting the representations, warranties, covenants and
obligations of VMW other than that included in the VMW Disclosure Schedule.
(c) For purposes of this Agreement, each statement or other item of
information set forth in the VMW Disclosure Schedule or in any update to the VMW
Disclosure Schedule accepted in writing by IKOS shall be deemed to be a
representation and warranty made by VMW in this Agreement.
12.2 INDEMNIFICATION BY VMW STOCKHOLDERS.
(a) From and after the Closing Date (but subject to the limitations in
Sections 12.1 and 12.3 ("Threshold; Ceiling; Exclusivity"), the stockholders of
VMW (the "VMW Stockholders") shall hold harmless and indemnify IKOS and Sub
(each an "Indemnitee") from and against, and shall compensate and reimburse each
of the Indemnitees for, any Damages which are directly or indirectly suffered or
incurred by any of the Indemnitees or to which any of the Indemnitees may
otherwise become subject (regardless of whether or not such Damages relate to
any third-party claim) and which arise from or as a result of, or are directly
or indirectly connected with: (i) any inaccuracy in or breach of any
representation or warranty set forth in Section 3 ("Representations and
Warranties of VMW") hereunder or in any certificate delivered by VMW in
connection with this Agreement; (ii) any breach of any covenant or obligation of
VMW hereunder; or (iii) any Legal Proceeding relating to any inaccuracy, breach
or expense of the type referred to in clause "(i)" or "(ii)" above (including
any Legal Proceeding commenced by any
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Indemnitee for the purpose of enforcing any of its rights under this Section 12
if such Indemnitee is the prevailing party in any such Legal Proceeding).
(b) If the Surviving Corporation suffers, incurs or otherwise becomes
subject to any Damages as a result of or in connection with any inaccuracy in or
breach of any representation, warranty, covenant or obligation, then (without
limiting any of the rights of the Surviving Corporation as an Indemnitee) IKOS
shall also be deemed, by virtue of its ownership of the stock of the Surviving
Corporation, to have incurred Damages as a result of and in connection with such
inaccuracy or breach.
12.3 THRESHOLD; CEILING; EXCLUSIVITY.
(a) The VMW Stockholders shall not be required to make any
indemnification payment pursuant to Section 12.2 ("Indemnification by VMW
Stockholders") until such time as the total amount of all Damages (including the
Damages arising from such inaccuracy or breach and all other Damages arising
from any other inaccuracies in or breaches of any representations or warranties)
that have been directly or indirectly suffered or incurred by any one or more of
the Indemnitees, or to which any one or more of the Indemnitees has or have
otherwise become subject, exceeds One Hundred Thousand Dollars ($100,000) in the
aggregate.
(b) IKOS' and Sub's sole recourse with respect to a breach by VMW of
its representations or warranties made in this Agreement or in the VMW
Disclosure Schedule shall be under the Indemnity Escrow and the indemnity
provisions of this Section 12.
12.4 LIMITATIONS RELATING TO VMW PROPRIETARY ASSETS CLAIMS.
(a) Notwithstanding anything to the contrary herein, if a third party
institutes an action, claim or proceeding against an Indemnitee alleging that
any of the VMW Proprietary Assets acquired by IKOS from VMW infringes or
constitutes a misappropriation of rights of such third party, the following
provisions shall apply: (i) The VMW Stockholders shall have no liability
(including without limitation liability for litigation expenses or amounts paid
in settlement) with respect to such alleged infringement or misappropriation if
it is determined (either pursuant to a judicial proceeding or jointly determined
by IKOS and the VMW Stockholder Representatives) that such VMW Proprietary
Assets do not infringe or constitute a misappropriation of rights of such third
party; (ii) if it is determined (either pursuant to a judicial proceeding or
jointly determined by IKOS and the VMW Stockholder Representatives) that such
VMW Proprietary Assets infringe or constitute a misappropriation of rights of
such third party, the VMW Stockholder Representatives shall be entitled to
either revise the product in question so as to make it not infringing, or remove
the product in question from the market (provided that IKOS shall have the right
to overrule any such decision that may be made by the VMW Stockholder
Representatives, subject to the condition that the VMW Stockholders shall have
no liability with respect to an infringing product shipped by IKOS following
IKOS's overruling of a decision to revise or stop shipping such product), and
(iii) the VMW Stockholders shall have no liability with respect to such alleged
infringement or
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misappropriation if it is determined (either pursuant to a judicial proceeding
or jointly determined by IKOS and the VMW Stockholder Representatives) that
another product being sold by IKOS at such time infringes or constitutes a
misappropriation of the same rights of such third party.
(b) With respect to any determinations that are to be made jointly by
IKOS and the VMW Stockholder Representatives pursuant to this Section 12, if
IKOS and the VMW Stockholder Representatives cannot reach an agreement on such
issue with in twenty (20) days of the commencement of discussions between them
with respect to such issue, either side may submit the matter to binding
arbitration in accordance with the provisions of Section 13.19 ("Arbitration").
12.5 SATISFACTION OF INDEMNIFICATION CLAIM. In the event the VMW
Stockholders shall have any liability (for indemnification or otherwise) to any
Indemnitee under this Section 12, satisfaction of such liability shall occur
solely from the Indemnity Escrow and the VMW Stockholders shall be severally
liable therefor, subject to the applicable limitation provided in Section
12.3(b), but in no case shall such liability of any VMW Stockholder exceed his
or her pro rata portion of the Indemnity Escrow.
12.6 NO CONTRIBUTION. The VMW Stockholders acknowledge and agree that
they shall not have and shall not exercise or assert (or attempt to exercise or
assert), any right of contribution, right of indemnity or other right or remedy
against the Surviving Corporation which they have in their capacity as
stockholders in connection with any indemnification obligation or any other
liability to which it may become subject under or in connection with this
Agreement or any certificate delivered by VMW in connection with this Agreement.
12.7 INDEMNIFICATION. Nothing herein shall limit the right of a VMW
Stockholder who is an officer or director of VMW prior to the Closing to receive
indemnification from the Surviving Corporation pursuant to indemnification and
exculpation provisions of the Certificate of Incorporation or bylaws of VMW with
respect to acts or omissions of such VMW Stockholder prior to the Closing.
12.8 INTEREST. Subject to the limitations of sections 12.3, 12.4 and
12.5, if the VMW Stockholders are required to hold harmless, indemnify,
compensate or reimburse any Indemnitee pursuant to this Section 12 with respect
to any Damages, then the VMW Stockholders shall also be liable to such
Indemnitee for interest on the amount of such Damages (for the period commencing
as of the date on which the VMW Stockholder Representative first received notice
of a claim for recovery by such Indemnitee and ending on the date on which the
liability to Indemnitee is fully satisfied by such VMW Stockholder) at a
floating rate equal to the rate of interest publicly announced by Bank of
America, N.T.& S.A. from time to time as its prime, base or reference rate.
12.9 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against the
Surviving Corporation, against IKOS or against any other Person) with respect to
which
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VMW may become obligated to hold harmless, indemnify, compensate or reimburse
any Indemnitee pursuant to this Section 12, the procedure set forth below shall
be followed.
(a) NOTICE. IKOS shall give prompt written notice of the commencement
of any such Legal Proceeding against IKOS or the Surviving Corporation for which
indemnity may be sought under Section 12 ("Indemnification and Escrow");
provided, however, that any failure on the part of IKOS to so notify VMW shall
not limit any of the obligations of VMW under this Section 12 unless the
ability to defend such claim is materially prejudiced by such failure or delay.
The Indemnification Period shall be tolled solely with respect to a particular
claim for the period beginning on the date the Indemnifying Party receives
written notice of that claim until the final resolution of such claim so long as
such claim is made within the Indemnification Period.
(b) DEFENSE OF CLAIM. The Indemnitee shall have the right to be
represented by counsel of its choice and to defend or otherwise control the
handling of any claim, or Legal Proceeding for which indemnity is sought.
Notwithstanding the foregoing, VMW may elect (by written notice by the VMW
Stockholder Representatives to IKOS within fifteen (15) days after receipt of
written notice under Section 12.9 ("Defense of Third Party Claims")) to assume
the defense of or otherwise control the handling of any such claim including tax
audit for any year prior to Closing or Legal Proceeding (other than for matters
relating to the intellectual property rights of IKOS (including VMW), or claims
by customers of IKOS) for which indemnity is sought, subject to the limitations
provided herein.
If the VMW Stockholders so elect to assume the defense of any such claim or
Legal Proceeding:
(i) the VMW Stockholders shall proceed to defend such claim or Legal
Proceeding in a diligent manner with counsel satisfactory to the Indemnitee, and
all expenses relating to the defense of such claim or Legal Proceeding shall be
borne and paid exclusively by the VMW Stockholders from the Indemnity Escrow or
from insurance coverage;
(ii) the Indemnitee shall make available to the VMW Stockholders any
non-privileged documents and materials in the possession of the Indemnitee that
may be necessary to the defense of such claim or Legal Proceeding;
(iii) the VMW Stockholders shall keep the Indemnitee informed of all
material developments and events relating to such claim or Legal Proceeding;
(iv) the Indemnitee shall have the right to participate in the defense
of such claim or Legal Proceeding at its sole cost and expense; and
(v) the VMW Stockholders shall not settle, adjust or compromise such
claim or Legal Proceeding without the prior written consent of the Indemnitee,
which consent shall not be unreasonably delayed, conditioned or withheld.
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If the VMW Stockholders do not (or cannot) elect to assume the defense of any
such claim or Legal Proceeding, the Indemnitee may proceed with the defense of
such claim or Legal Proceeding on its own. If the Indemnitee so proceeds with
the defense of any such claim or Legal Proceeding on its own:
(vi) all expenses relating to the defense of such claim or Legal
Proceeding (whether or not incurred by the Indemnitee) shall be borne and paid
exclusively by the VMW Stockholders from the Indemnity Escrow should a third
party prevail on any such claim or Legal Proceeding;
(vii) the VMW Stockholders shall make available to the Indemnitee any
non-privileged documents and materials in the possession or control of the VMW
Stockholders that may be necessary to the defense of such claim or Legal
Proceeding except for documents or materials which are sealed by a court order
or are subject to a nondisclosure agreement prohibiting disclosure by the VMW
Stockholders;
(viii) the Indemnitee shall keep the VMW Stockholders informed of all
material developments and events relating to such claim or Legal Proceeding; and
(ix) each VMW Stockholder shall have the right to participate in the
defense of such claim or legal proceeding at its sole cost and expense; and
(x) the Indemnitee shall have the right to settle, adjust or
compromise such claim or Legal Proceeding with the written consent of the VMW
Stockholders; provided, however, that the VMW Stockholders shall not
unreasonably withhold such consent.
12.10 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN IKOS. No
Indemnitee (other than IKOS or any successor thereto or assignee thereof) shall
be permitted to assert any indemnification claim or exercise any other remedy
under this Agreement unless IKOS (or any successor thereto or assign thereof)
shall have consented to the assertion of such indemnification claim or the
exercise of such other remedy.
12.11 INDEMNITY ESCROW. As soon as practicable after the Effective
Time, IKOS shall deposit into an escrow account (the "Indemnity Escrow") with
Comerica Bank as escrow agent (the "Indemnity Escrow Agent"), funds equal in
amount to ten percent (10%) of the Aggregate Consideration (the "Indemnity
Escrow Holdback"). The Indemnity Escrow Holdback shall be withheld on a pro
rata basis from the holders of VMW Shares who otherwise would have been entitled
to receive such amounts at the Effective Time and shall be governed by the terms
set forth herein and in an escrow agreement (the "Indemnity Escrow Agreement")
in substantially the form attached hereto as Exhibit G. The Indemnity Escrow
---------
(but only up to a maximum of the total aggregate value of the Indemnity Escrow
Holdback) shall be available to compensate the IKOS Indemnitees for any loss, to
the extent of the amount of Damages that such Indemnity has incurred by reason
of the breach of VMW of any representation, warranty, covenant or agreement of
VMW contained herein, or by reason of any misrepresentation by VMW made in or
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pursuant to Section 3 ("Representations and Warranties of VMW") of this
Agreement or in any certificate delivered by VMW pursuant to this Agreement.
12.12 VMW STOCKHOLDER REPRESENTATIVES.
(a) By virtue of their approval of this Agreement, the stockholders of
VMW will be deemed to have irrevocably constituted and appointed, effective as
of the Effective Time, Allen Michels and Anant Agarwal (together with their
permitted successors, the "VMW Stockholder Representatives"), as their true and
lawful agent and attorney-in-fact to enter into any agreement in connection with
the transactions contemplated by this Agreement or the Indemnity Escrow
Agreement, to exercise all or any of the powers, authority and discretion
conferred on him under any such agreement, to waive any terms and conditions of
any such agreement (other than the payment of the Indemnity Escrow Holdback), to
give and receive notices and communications, to authorize delivery to IKOS of
the Indemnity Escrow Holdback or other property from the Indemnity Escrow in
satisfaction of claims by IKOS, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of the
VMW Stockholder Representatives for the accomplishment of the foregoing. Such
agency may be changed by the holders of a majority in interest of the Indemnity
Escrow from time to time upon not less than ten (10) days' prior written notice
to IKOS. No bond shall be required of the VMW Stockholder Representatives, and
the VMW Stockholder Representatives shall receive no compensation for their
services. Notices or communications to or from the VMW Stockholder
Representatives shall constitute notice to or from each of the VMW Stockholders.
This power of attorney is coupled with an interest and is irrevocable.
(b) The VMW Stockholder Representatives shall not be liable for any
act done or omitted hereunder as VMW Stockholder Representatives while acting in
good faith and not in a manner constituting gross negligence, and any act done
or omitted pursuant to the advice of counsel shall be conclusive evidence of
such good faith. The VMW Stockholders shall severally indemnify each of the VMW
Stockholder Representatives and hold each harmless against any loss, liability
or expense incurred without gross negligence or bad faith on the part of such
VMW Stockholder Representative and arising out of or in connection with the
acceptance or administration of his duties hereunder.
13. MISCELLANEOUS.
13.1 GOVERNING LAWS. It is the intention of the parties hereto that
the internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto. The parties hereby agree that any suit to enforce any provision
of this Agreement or arising out of or based upon this Agreement or the business
relationship between any of the parties hereto brought by VMW shall be brought
in the United States District Court for the Northern District of California or
the Superior or Municipal Court in and for the County of Santa Clara,
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California and that any suit to enforce any provision of this Agreement or
arising out of or based upon this Agreement or the business relationship between
any of the parties hereto brought by IKOS shall be brought in the United States
District Court for the District of Massachusetts or the Superior Court for the
Commonwealth of Massachusetts in and for the County of Middlesex. Each party
hereby agrees that such courts, as applicable, shall have in personam
jurisdiction with respect to such party, and such party hereby submits to the
personal jurisdiction of such courts.
13.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
13.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
13.4 ENTIRE AGREEMENT. This Agreement, the exhibits hereto, the
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
13.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
13.6 EXPENSES. Except as provided to the contrary herein, each party
shall pay all of its own costs and expenses incurred with respect to the
negotiation, execution and delivery of this Agreement and the exhibits hereto.
In the event the Merger is consummated, all legal, accounting, investment
banking, broker's and finder's fees incurred by VMW and/or its stockholders in
connection with the Acquisition up to $150,000 shall be payable by VMW at or
prior to the Closing, subject to review and reasonable approval by IKOS, or by
IKOS at or following Closing upon presentation of an adequate and appropriate
bill. Any expenses in excess of such amount shall be deemed to be expenses of
the stockholders, shall be borne by the stockholders of VMW and shall not become
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obligations of VMW. The VMW Stockholders shall make arrangements satisfactory to
IKOS at or prior to the Closing for the satisfaction of such amounts.
13.7 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party shall be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy shall not preclude the exercise of any other.
Notwithstanding the foregoing, if the Closing occurs, the sole and exclusive
remedy of IKOS and Sub shall be as set forth in Section 12 ("Indemnification
and Escrow") and the Indemnity Escrow Agreement.
13.8 AMENDMENT AND WAIVERS. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
13.9 SURVIVAL OF AGREEMENTS. Subject to Section 12.1(a), all
covenants, agreements, representations and warranties made herein shall survive
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby notwithstanding any investigation of the
parties hereto.
13.10 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
13.11 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be
counted in calculating the amount of a judgment for purposes of determining if a
party is entitled to recover costs or attorneys' fees. Notwithstanding the
foregoing, attorney's fees payable by VMW Stockholders shall be included within
Damages payable from and within the overall limits of the Indemnity Escrow.
13.12 NOTICES. Any notice provided for or permitted under this
Agreement will be treated as having been received (a) when delivered personally,
(b) when sent by confirmed telex or telecopy, (c) one (1) day following when
sent by commercial overnight courier with written verification of receipt, or
(d) three (3) days following when mailed postage prepaid by certified or
registered mail, return receipt requested, to the party to be notified, at the
address set forth below, or at such other place of which the other party has
been notified in accordance with the provisions of this Section 13.12
("Notices").
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VMW: VMW Machine Works, Inc.
One Kendall Square
Building 600
Cambridge, MA 02139
Attention: President
VMW Stockholder
Representatives: VMW Stockholder Representatives
One Kendall Square
Building 600
Cambridge, MA 02139
With copy to: Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Facsimile: (617) 338-2880
Attention: Joseph G. Hadzima, Jr.
IKOS: IKOS Systems, Inc.
19050 Pruneridge Avenue
Cupertino, CA 95014
Attention: Ramon A. Nunez
With copy to: Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (415) 327-3699
Attention: James M. Koshland
13.13 TIME. Time is of the essence of this Agreement.
13.14 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
shall not be construed for or against any party. The titles and headings herein
are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
13.15 NO JOINT VENTURE. Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section 13.15 ("No Joint Venture").
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13.16 PRONOUNS. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
13.17 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
13.18 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of
this Agreement are intended, nor shall be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner of any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof shall be personal solely between the parties
to this Agreement.
13.19 ARBITRATION. Each party agrees that any dispute arising out of
or relating to this Agreement shall be settled by (i) agreement of the
Stockholder Representatives and IKOS or (ii) arbitration in Palo Alto,
California and, except as herein specifically stated, in accordance with the
commercial arbitration rules of the American Arbitration Association ("AAA
Rules") then in effect. However, in all events, these arbitration provisions
shall govern over any conflicting rules which may now or hereafter be contained
in the AAA Rules. Any judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction over the subject matter thereof. The
arbitrator shall have the authority to grant any equitable and legal remedies
that would be available in any judicial proceeding instituted to resolve such
dispute.
(a) Compensation of Arbitrator. Any such arbitration shall be
--------------------------
conducted before a single arbitrator who shall be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon his
or her rate of compensation.
(b) Selection of Arbitrator. The AAA Rules for the selection of the
-----------------------
arbitrator shall be followed by IKOS and the Stockholder Representatives.
(c) Payment of Costs. IKOS and the stockholders of VMW as a group
----------------
shall each pay fifty percent (50%) of the initial compensation to be paid to the
arbitrator in any such arbitration and fifty percent (50%) of the costs of
transcripts and other normal and regular expenses of the arbitration
proceedings; provided, however, that the prevailing party in any arbitration
shall be entitled to an award of attorneys' fees and costs, and all costs of
arbitration, other than those provided for above, will be paid by the losing
party and provided, further, that the obligations of the VMW Stockholders to pay
such fees shall be limited to and payable solely from the Indemnity Escrow
Holdback.
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(d) Discovery. The parties shall be entitled to conduct discovery
---------
proceedings in accordance with the provisions of the Federal Rules of Civil
Procedure, subject to any limitation imposed by the arbitrator.
(e) Burden of Proof. For any claim submitted to arbitration, the
---------------
burden of proof shall be as it would be if the claim were litigated in a
judicial proceeding.
(f) Judgment. Upon the conclusion of any arbitration proceedings
--------
hereunder, the arbitrator shall render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached by him and shall deliver such documents to each party to this Agreement
along with a signed copy of the award.
(g) Terms of Arbitration. The arbitrator chosen in accordance with
--------------------
these provisions shall not have the power to alter, amend or otherwise affect
the terms of these arbitration provisions or the provisions of this Agreement.
In no event shall the arbitrator have the power to or order payment of
amounts by VMW Stockholders other than from and limited to the Indemnity Escrow
as provided herein.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
IKOS SYSTEMS, INC. VMW MACHINE WORKS, INC.
By: /s/ Ramon A. Nunez By: /s/ Allen H. Michels
----------------------------- -----------------------------
Title: Chief Executive Officer Title: Chief Executive Officer
------------------------- -------------------------
VMW ACQUISITION VMW STOCKHOLDER
CORPORATION REPRESENTATIVES
(as to acceptance of that responsibility
in accordance with Section 12)
By: /s/ Ramon A. Nunez By: /s/ Anant Agarwal
----------------------------- -----------------------------
Title: Chief Executive Officer Anant Agarwal
------------------------- ---------------------------------
PRINTED NAME
By: /s/ Allen H. Michels
-----------------------------
Allen H. Michels
---------------------------------
PRINTED NAME
[SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
MERGER CONSIDERATION SCHEDULE
-----------------------------
The Aggregate Consideration shall be allocated to the VMW Stockholders in
the following priority:
(i) To the certain VMW Preferred Stockholders who advanced certain funds
to VMW in bridge financings pursuant to notes dated as of December
20, 1995 and February 9, 1996 in the aggregate amount of $497,884 and
which notes accrue interest at the rate of nine percent (9%) per
annum, repayment for such notes and interest, payable in cash;
(ii) To the VMW Preferred Stockholders, their respective liquidation
preferences as specified in the VMW Certificate of Incorporation, as
amended, payable in cash;
(iii) To the VMW Common Stockholders (including holders of options to
acquire VMW stock), $3.00 per share payable in IKOS Common Stock; and
(iv) To the VMW Preferred Stockholders an amount per share equal to the
amount remaining after subtracting from the Aggregate Consideration
the amounts set forth in the preceding subparagraphs (i), (ii) and
(iii) divided by the total number of shares of Preferred Stock;
provided, however, that if the aggregate amount of such cash
-------- -------
distributions to such holders combined with distributions made
pursuant to the preceding subparagraphs (i) and (ii) shall exceed $10
million, then each holder so electing shall have such cash
distribution reduced on a pro rata basis such that the aggregate cash
distribution shall be no greater than $10 million, and the amount of
any such cash reduction shall be satisfied with IKOS Common Stock.
<PAGE>
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is entered into as of May __1996, by
and among IKOS Systems, Inc., a Delaware corporation (the "Company"), and the
undersigned VMW stockholders receiving shares of IKOS Common Stock ("Rights
Holders") pursuant to the merger (the "Merger") by and among IKOS Systems, Inc.,
a Delaware corporation ("IKOS"), VMW Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of IKOS ("Sub") and Virtual Machine
Works, Inc., a Delaware corporation ("VMW").
Pursuant to the terms of the Merger, Rights Holders and the Company desire
to provide for certain registration and other rights all as set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the parties agree as follows:
1. Registration Rights.
-------------------
1.1 Definitions. As used in this Agreement, the following terms shall
-----------
have the following respective meanings:
(a) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing with the SEC a registration
statement in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of the effectiveness of such
registration statement.
(b) The term "Registrable Securities" means (i) all shares of the
Company's Common Stock issued upon the Merger; (ii) all shares of capital stock
issued in lieu of any of the stock referred to in clause (i) in any
reorganization, which have not been sold to the public; and (iii) all shares of
capital stock issued in respect of any of the stock referred to in clauses (i)
or (ii) as a result of any stock split, stock dividend, recapitalization or the
like, which have not been sold to the public.
(c) The terms "Holder" or "Holders" means any person or persons
to whom Registrable Securities were originally issued or successors and
assignees under Section 2.3 hereof who hold Registrable Securities.
(d) The term "Initiating Holders" means any Holder or Holders of
a majority of the aggregate of the Registrable Securities then outstanding.
(e) The term "Commission" means the Securities and Exchange
Commission.
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1.2 Right To Include in Current Registration. The Company currently
-----------------------------------------
intends to file with the Commission a registration statement (the "Current
Registration Statement") to register certain shares of its stock for an
underwritten public offering shortly after the consummation of the Merger and,
if so, notwithstanding anything to the contrary contained herein, the Holders of
Registerable Securities will be entitled to include such Registerable Securities
in the Current Registration Statement in accordance with subsection 1.3(b).
1.3 Demand Registration.
-------------------
(a) Request for Registration. Upon the request of Initiating
------------------------
Holders, the Company shall (i) prepare and file with the Commission a
registration statement on any form for which the Company then qualifies or which
counsel for the Company shall deem appropriate and which form shall be available
for the disposition of the Registrable Securities in accordance with the
intended method or methods of disposition thereof on or before November 30, 1996
and (ii) use its best efforts to cause such registration statement to be
declared effective by the Commission as soon as possible thereafter, and shall
use its best efforts to effect all such other registrations, qualifications and
compliances (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualifications under the applicable
blue sky or other state securities laws and appropriate compliance with
exemptive regulations issued under the Securities Act and any other governmental
requirements or regulations) as would permit or facilitate the sale and
distribution of all of the Registrable Securities; provided that the Company
shall not be obligated to take any action to effect such registration,
qualification or compliance pursuant to this subsection 1.3:
(A) in any particular jurisdiction in which the Company would
be required to execute a general qualification or compliance unless the Company
is already subject to service in such jurisdiction and except as required by the
Securities Act;
(B) after the Company has effected one such registration
pursuant to this subsection 1.3 and such registration has been declared or
ordered effective unless the Commission issues a stop order with respect
thereto; or
(C) if the Current Registration Statement becomes effective,
then the Company is not required to effect such demand registration until six
months after completion of the offering for which the Current Registration
Statement was filed and in such event the request for registration may be made
up to twelve months after completion of such offering.
Notwithstanding the foregoing, if the Company shall furnish to such holders
a certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be detrimental to the Company
and its stockholders for such registration statement to be filed at the date
filing would be required and it is therefore essential to defer the filing of
such registration statement, the Company shall have an additional period of not
more than 90 days after the expiration of the initial 90-day period within which
to file such registration statement.
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(b) Underwriting. If the Holders intend to distribute the
------------
Registrable Securities by means of an underwriting, they shall so advise the
Company. In such event, the underwriter shall be selected by a majority in
interest of the Holders and shall be reasonably acceptable to the Company. The
right of any Holder to registration pursuant to subsection 1.3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Holders) to the
extent provided herein. The Company shall (together with all Holders proposing
to distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters.
Notwithstanding any other provision of this subsection 1.3, if the underwriter
advises the Holders in writing that marketing factors require a limitation of
the number of shares to be underwritten, the Holders shall so advise all
Holders, and the number of shares of Registrable Securities that may be included
in the registration and underwriting shall be allocated among all Holders
thereof in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities held by such Holders; provided, however, that the number
of shares of Registrable Securities to be included in such underwriting shall
not be reduced unless all other securities are first entirely excluded from the
underwriting. If any Holder of Registrable Securities disapproves of the terms
of the underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company, the underwriter and the Holders. Any Registrable
Securities which are excluded from the underwriting by reason of the
underwriter's marketing limitation or withdrawn from such underwriting shall be
withdrawn from such registration.
(c) Company Shares. If the managing underwriter has not limited
--------------
the number of Registrable Securities to be underwritten, the Company may include
securities for its own account or for the account of others in such registration
if the managing underwriter so agrees and if the number of Registrable
Securities which would otherwise have been included in such registration and
underwriting will not thereby be limited.
(d) Shelf Registration. Upon filing any registration pursuant to
------------------
Section 1 herein, the Company shall use its best efforts to keep such
registration effective for at least 180 days or, if longer, until all
Registrable Securities included therein have been sold by the Holders thereof.
1.4 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such person within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement
3
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thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance pursuant to the
Securities Act or any state securities laws, rules or regulations, and the
Company will reimburse each such Holder, each of its officers and directors, and
each person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable to any such person in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission (or alleged untrue statement or omission), made in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder, controlling person or
underwriter and stated to be specifically for use therein or the preparation
thereby.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holder, such directors, officers, persons, underwriters or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating, preparing or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein or the preparation thereby.
Notwithstanding the foregoing, the liability of each Holder under this
subsection (b) shall be limited to an amount equal to the initial public
offering price of the shares sold by such Holder, unless such liability arises
out of or is based on willful conduct by such Holder.
(c) Each party entitled to indemnification under this Section 1.4
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
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Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
1.5 Rule 144 Reporting. With a view to making available to Holders the
------------------
benefits of Rule 144 promulgated by the Commission under the Securities Act, the
Company agrees to use its best efforts to:
(a) make and keep adequate current public information with
respect to the Company available, as those terms are used in Rule 144 under the
Securities Act, at all times after the Closing Date;
(b) file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Exchange Act of
1934, as amended (the "Exchange Act"); and
(c) furnish to Holders promptly upon request a written statement
by the Company as to its compliance with the reporting requirements of Rule 144
and the Exchange Act, a copy of the most recent annual or quarterly report of
the Company, and such other reports and documents of the Company as any Holder
may reasonably request in order to permit such Holder to avail itself of any
rule or regulation of the Commission allowing such Holder to sell its Company
Common Stock without registration.
2. General.
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2.1 Waivers and Amendments. With the written consent of the
----------------------
record or beneficial holders of at least a majority of the Registrable
Securities, the obligations of the Company and the rights of the Holders of the
Registrable Securities under this agreement may be waived (either generally or
in a particular instance, either retroactively or prospectively, and either for
a specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that no such modification, amendment or waiver shall reduce
the aforesaid percentage of Registrable Securities without the consent of all of
the Holders of the Registrable Securities. Upon the effectuation of each such
waiver, consent, agreement of amendment or modification, the Company shall
promptly give written notice thereof
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to the record holders of the Registrable Securities who have not previously
consented thereto in writing. This Agreement or any provision hereof may be
changed, waived, discharged or terminated only by a statement in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought, except to the extent provided in this Section 2.1.
2.2 Governing Law. This Agreement shall be governed in all respects 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
California.
2.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
2.4 Entire Agreement. This Agreement and the other documents delivered
----------------
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and this
Agreement shall supersede and cancel all prior agreements between the parties
hereto with regard to the subject matter hereof.
2.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be effective upon personal
delivery or three (3) business days after mailing by first class mail, postage
prepaid, certified or registered mail, return receipt requested, addressed (a)
if to any Holder or Founder, at such Holder's or Founder's address as set forth
in the Company's records, or at such other address as such Holder or Founder
shall have furnished to the Company in writing, or (b) if to the Company, at
19050 Pruneridge Avenue, Cupertino, CA 95014, or at such other address as the
Company shall have furnished to the Holder or Founder in writing.
2.6 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal, or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
2.7 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
2.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
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IN WITNESS WHEREOF, the parties hereby have executed this Agreement on the
date first above written.
COMPANY:
IKOS SYSTEMS, INC.
By:
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Its:
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RIGHTS HOLDERS:
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[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
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Exhibit 5.1
May 24, 1996
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington D.C. 20549
Re: IKOS Systems, Inc.
Registration Statement on Form S-3
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
and the Selling Stockholders of up to 1,290,390 shares of the Company's common
stock, par value $0.01 (the "Common Stock") pursuant to the Company's
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on or about May 24, 1996 (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 1,290,390 shares
of Common Stock to be issued and sold by the Company and the Selling
Stockholders (of which 122,078 shares are being sold by selling stockholders and
up to 168,312 shares are to be issued to cover over-allotments, if any) are duly
authorized shares of Common Stock of the Company and, when issued against
payment of the purchase price therefor, will be validly issued, fully paid and
nonassessable.
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
