<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended June 29, 1996 or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to __________
COMMISSION FILE NUMBER 0-18623
---------------------------------------------
IKOS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0100318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19050 PRUNERIDGE AVE., CUPERTINO, CA 95014
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(408) 255-4567
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK $.01 PAR VALUE 7,513,000
---------------------------
(Title of Class) (Outstanding as of June 29, 1996)
<PAGE>
IKOS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JUNE 29, 1996
INDEX
-----
Part I: Financial Information
Item 1: Financial Statements
PAGE
Consolidated Balance Sheets at
June 29, 1996 and September 30, 1995............................ 3
Consolidated Statements of Operations
for the three and nine months ended
June 29, 1996 and July 1, 1995.................................. 4
Consolidated Statements of Cash Flows
for the nine months ended
June 29, 1996 and July 1, 1995.................................. 5
Notes to Consolidated Financial Statements........................ 6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations................ 8
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K.................................. 11
Signatures........................................................ 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 29, September 30,
1996 1995
--------- --------------
(Unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 9,131 $ 7,305
Short-term investments............................. 6,761 450
Accounts receivable (net of allowances for
doubtful accounts of $246 and $171, respectively). 4,246 6,046
Inventories........................................ 2,570 1,328
Prepaid expenses and other current assets.......... 219 271
-------- --------
Total current assets............................. 22,927 15,400
Equipment and leasehold improvements:
Office and evaluation equipment.................... 3,284 2,730
Machinery and equipment............................ 5,573 4,985
Leasehold improvements............................. 331 287
-------- --------
9,188 8,002
Less allowances for depreciation and
amortization................................... (6,390) (6,363)
-------- --------
2,798 1,639
Intangible assets (net of amortization
of $101 in 1996).................................. 6,161 --
Other assets........................................ 202 113
-------- --------
$ 32,088 $ 17,152
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 3,263 $ 1,613
Accrued payroll and related expenses............... 1,760 1,195
Accrued commissions................................ 186 697
Income taxes payable............................... 526 188
Other accrued liabilities.......................... 216 480
Deferred maintenance revenues...................... 3,949 3,030
Current portion of long-term debt.................. 450 688
-------- --------
Total current liabilities........................ 10,350 7,891
Long-term debt, less current portion................ 650 1,300
Accrued rent........................................ 249 251
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares
authorized, none issued or outstanding............ -- --
Common stock, $.01 par value; 25,000
shares authorized, 7,513 and 5,886
issued and outstanding, respectively.............. 75 59
Additional paid-in capital......................... 43,778 27,034
Accumulated deficit................................ (23,014) (19,383)
-------- --------
Total stockholders' equity....................... 20,839 7,710
-------- --------
$ 32,088 $ 17,152
======== ========
</TABLE>
(1) These amounts have been derived from audited financial statements
See notes to consolidated financial statements.
3
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
-------------------- ------------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net revenues:
Product.......................... $ 9,874 $6,149 $26,845 $16,683
Maintenance...................... 1,976 1,246 5,436 3,500
------- ------ ------- -------
Total net revenues............. 11,850 7,395 32,281 20,183
Cost of revenues:
Product.......................... 2,126 1,552 6,109 4,313
Maintenance...................... 384 274 934 820
------- ------ ------- -------
Total cost of revenues......... 2,510 1,826 7,043 5,133
======= ====== ======= =======
Gross profit..................... 9,340 5,569 25,238 15,050
Operating expenses:
Research and development......... 2,640 1,012 5,908 2,966
Sales and marketing.............. 3,517 3,085 10,428 8,353
General and administrative....... 778 542 2,501 1,576
Acquired in-process research
and development................. 9,600 -- 9,600 --
Amortization of intangibles...... 101 -- 101 --
------- ------ ------ -------
Total operating expenses....... 16,636 4,639 28,538 12,895
------- ------ ------- -------
Income (loss) from operations..... (7,296) 930 (3,300) 1,225
Other income (expense):
Interest income.................. 259 42 741 91
Interest expense................. -- (23) (42) (86)
Other income..................... 31 29 90 87
------- ------ ------- -------
Total other income............. 290 48 789 92
------- ------ ------- -------
Income (loss) before
income taxes..................... (7,006) 978 (2,511) 2,247
Provision for income taxes.......... 410 90 1,120 196
------- ------ ------- -------
Net income (loss)................... $(7,416) $ 888 $(3,631) $ 2,051
======= ====== ======= =======
Net income (loss) per share......... $ (1.00) $0.14 $(0.51) $0.34
======= ====== ======= =======
Common and common equivalent
shares used in computing
per share amounts.................. 7,407 6,281 7,149 6,025
======= ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents in thousands
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
---------------------
June 29, July 1,
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss)..................................... $ (3,631) $ 2,051
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization....................... 892 1,014
Purchase of in-process research and development..... 9,600 --
Loss on retirement of equipment..................... 25 2
Deferred rent....................................... (2) 28
Changes in operating assets and liabilities:
Accounts receivable................................. 1,999 (1,374)
Inventories......................................... (1,242) (74)
Prepaid expenses and other current assets........... 55 16
Other assets........................................ (80) (26)
Accounts payable.................................... 1,644 (320)
Accrued payroll and other expenses.................. 512 (7)
Accrued commissions................................. (511) (117)
Income taxes payable................................ 338 34
Other accrued liabilities........................... (265) 31
Deferred maintenance revenues....................... 919 695
-------- -------
Net cash provided by operating activities......... 10,253 1,953
Investing activities:
Purchases of equipment and leasehold improvements... (1,788) (726)
Investment in Virtual Machine Works, Inc............ (1,250) --
Acquisition of Virtual Machine Works, Inc........... (9,751) --
Purchase of short-term investments.................. (15,466) (19)
Maturities of short-term investments................ 9,155 --
-------- -------
Net cash used in investing activities............. (19,100) (745)
Financing activities:
Principal payments on long-term debt................ (888) (383)
Sale of common stock................................ 11,561 540
-------- -------
Net cash provided by financing activities......... 10,673 157
-------- -------
Increase in cash and cash equivalents.................... 1,826 1,365
Cash and cash equivalents at beginning of period......... 7,305 3,422
-------- -------
Cash and cash equivalents at end of period............... $ 9,131 $ 4,787
======== =======
</TABLE>
Non cash transactions:
In connection with the acquisition of VMW the Company paid approximately
$5,199,000 in IKOS common stock and options and warrants to purchase common
stock.
See notes to consolidated financial statements.
5
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying consolidated financial statements at June 29, 1996 and for
the three and nine month periods ended June 29, 1996 and July 1, 1995, have
been prepared in conformity with generally accepted accounting principles,
consistent with those applied in, and should be read in conjunction with,
the audited consolidated financial statements for the year ended September
30, 1995 included in the Form 10-K as filed with the Securities and
Exchange Commission on December 22, 1995. The unaudited interim financial
information reflects all normal recurring accruals which are, in the
opinion of management, necessary for a fair statement of results for the
interim periods presented. The results for the three and nine month periods
ended June 29, 1996 are not necessarily indicative of results expected for
the full year.
2. 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.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of (in thousands):
<TABLE>
<CAPTION>
June 29, September 30,
1996 1995
-------- --------------
<S> <C> <C>
Purchased parts.......... $ 362 $ 347
Work-in-process.......... 1,681 563
Finished goods........... 527 418
------ ------
Total inventories.... $2,570 $1,328
====== ======
</TABLE>
4. 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
options and warrants have been included in the computation using the
treasury stock method when dilutive.
5. Acquisition of Virtual Machine Works
In May 1996, the Company completed the acquisition of Virtual Machine Works
Inc. (VMW), a development stage company and a developer of logic emulation
systems. Under the terms of the acquisition, the Company paid approximately
$10,000,000 in cash and issued approximately 113,000 shares of common stock
to the former stockholders of VMW. In addition, the options to purchase VMW
stock were converted into options to purchase approximately 84,000 shares
of IKOS common stock. In connection with the acquisition, the Company
recorded a charge of approximately $9,600,000 for the acquisition of in-
process research and development.
6
<PAGE>
5. Acquisition of Virtual Machine Works (continued)
In connection with the acquisition, the Company also issued warrants to
purchase 25,000 shares of common stock at $23.50 per share in return for
professional services rendered. These warrants, which were valued at
approximately $200,000, are included as consideration in connection with
the acquisition. These warrants expire on April 19, 2001.
6. Pro Forma Net Income
In May 1996, the Company completed the acquisition of VMW (see Note 5). The
transaction was accounted for under the purchase method of accounting and
included a charge to operations of $9,600,000 related to the purchase of
in-process research and development. The following pro forma information
reflects net income and net income per share excluding the $9,600,000
charge for purchased in-process research and development. The pro forma net
income per share was computed using the weighted average number of shares
of common stock and common equivalent shares with the assumed dilution from
stock options (using the treasury stock method).
<TABLE>
<CAPTION>
Three Months Nine Months
ended ended
June 29, 1996 June 29,1995
------------- ------------
<S> <C> <C>
Pro forma net income.................... $2,184 $5,969
====== ======
Pro forma net income per share.......... $ 0.26 $ 0.76
====== ======
Common and common equivalent
shares used in computing per share.... 8,278 7,880
====== ======
</TABLE>
7. Subsequent Event
In July 1996, the Company issued approximately 600,000 shares of common
stock upon completion of a public offering which resulted in net proceeds
to the Company of approximately $10,000,000.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the three month period ended June 29, 1996 were $11,850,000, an
increase of approximately 60% over the same quarter in fiscal 1995. Revenues for
the nine month period ended June 29, 1996 were $32,281,000, representing an
increase of approximately 60% over the same period in 1995. The increase for
the three and nine month periods ended June 29, 1996 is primarily the result of
increases in maintenance revenues and the continued growth in unit sales of the
Voyager systems (primarily the NSIM product) which contributed over 76% of the
net revenues for the three and nine month periods. Maintenance revenue for the
three and nine months ended June 29, 1996 increased 59% and 55%, respectively,
over the same periods of the previous fiscal year as a result of growth in the
installed base of systems.
International sales for the three and nine months ended June 29, 1996, were
$3,736,000 and $10,098,000, respectively, representing increases of
approximately 33% and 50%, respectively, over the same periods in fiscal 1995.
International sales accounted for over 31% of total sales during the three and
nine month periods ended June 29, 1996.
GROSS PROFIT MARGINS
Gross profit margins improved to approximately 79% and 78% of net revenues for
the three and nine months ended June 29, 1996, respectively, as compared to 75%,
for the same periods of fiscal 1995. The increases for the three and nine
month periods ended June 29, 1996 was primarily the result of increased
maintenance revenues without any significant increases in maintenance costs as
well as positive margin impact from product revenue mix during the periods.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and nine months ended June 29,
1996 were $2,640,000 and $5,908,000, respectively, representing increases of
approximately 161% and 99%, respectively, over the same periods of fiscal 1995.
The increase for the three month period was primarily due to the addition of the
VMW operations and increased headcount and associated expenses. In addition to
the increased personnel expenses and the addition of the VMW operations,
research and development costs increased significantly during the nine month
period as a result of the acquisition in the first quarter of 1996 of certain
technology that had not yet reached technological feasibility and did not have
alternative future uses. The Company expects research and development expenses
to increase slightly in absolute dollars over the remainder of the year as the
Company continues its product enhancement, new product development and
technology development programs.
8
<PAGE>
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three and nine month periods ended June 29,
1996, increased to $3,517,000 and $10,428,000, respectively, representing
increases of 14% and 25%, respectively, when compared to the same periods in
fiscal 1995. The increases are 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 fiscal
quarter reflecting additional headcount, commission expense and marketing
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $778,000 and $2,501,000 for the three
and nine month periods ended June 29, 1996, respectively, representing an
increase of 44% and 59%, respectively, for the same periods in fiscal 1995. The
increases are due primarily 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 1996, the Company had $15,892,000 in cash, cash equivalents and
short term investments which compared to $7,755,000 as of September 30, 1995.
Net cash provided by operating activities was $10,253,000 for the nine
months ended June 29, 1996 and was primarily due to the net loss adjusted for
acquired in-process research and development in connection with the acquisition
of VMW plus depreciation and amortization, a reduction in accounts receivable,
increased deferred maintenance revenues, accounts payable and accrued payroll.
These increases were partially offset by an increase in inventories and a
decrease in accrued commissions and other accrued liabilities.
Net cash used in investing activities during the nine months ended June 29,
1996, was approximately $19,100,000 due primarily to the acquisition of VMW
which totaled $11,001,000 including the advance to VMW of $1,250,000. In
addition the use of cash for investing activities included net purchases of
approximately $6,311,000 of short-term investments and $1,788,000 of equipment,
primarily engineering workstations. The Company expects additional capital
expenditures throughout the remainder of the year as expected headcount
additions will require additional computers and engineering workstations.
Net cash provided by financing activities for the nine months ended June 29,
1996 was $10,673,000 which was a result of the completion of a 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 $10,450,000. Offsetting the increases in cash
provided by financing activities were principal payments of approximately
$888,000 on long-term debt. Subsequent to the end of the quarter, the Company
completed another public offering whereby the Company raised approximately
$10,065,000.
9
<PAGE>
In May 1996, the Company completed the acquisition of Virtual Machine Works Inc.
(VMW), a development stage company and a developer of logic emulation systems.
Under the terms of the acquisition, the Company paid approximately $10,000,000
in cash and issued approximately 113,000 shares of common stock to the former
stockholders of VMW. In addition, the options to purchase VMW stock were
converted into options to purchase approximately 84,000 shares of IKOS common
stock. In connection with the acquisition, the Company recorded a charge of
approximately $9,600,000 for the acquisition of in-process research and
development.
In connection with the acquisition, the Company issued warrants to purchase
25,000 shares in common stock at $23.50 per share in return for professional
services rendered. These warrants, which were valued at approximately $200,000,
are included as consideration in connection with the acquisition. These
warrants expire on April 19, 2001.
The Company's primary unused sources of funds at June 29, 1996, consisted of
$15,892,000 in cash, cash equivalents and short term investments. Upon
completion of the Company's public offering in July 1996, the Company's primary
unused sources funds consisted of approximately $25,957,000 in cash, cash
equivalents and short term investments. 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.
Forward-looking statements in this Quarterly Report on Form 10-Q are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking statements
pertaining to the Company involve risks and uncertainties, including, without
limitation, the continued acceptance of the Company's simulation products, the
development and acceptance of the Company's emulation products, the successful
integration of VMW into the business and operations of the Company, changes in
the marketplace and increased levels of competition for the Company and the
Company's dependence upon third party suppliers and upon its intellectual
property rights. Further information on potential factors which may affect the
Company's financial results are included in the Company's Registration Statement
on Form S-3, effective June 26, 1996.
10
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<C> <S> <C>
2.1 Agreement and Plan of Reorganization among the Company, VMW Acquisition
Corporation and VMW dated May 14, 1996 (Incorporated by reference to
Exhibit 2.1 of the Company's registration statement on Form S-3
effective June 26, 1996).
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit 3.1
of the Company's registration statement on Form S-1 effective July 25,
1990).
3.2 Certificate of Amendment of Certificate of Incorporation filed May 5,
1994. (Incorporated by reference to Exhibit 4.1 of the Company's
registration statement on Form S-2 effective October 12, 1995.)
3.3 Certificate of Amendment of Certificate of Incorporation filed April
24, 1995. (Incorporated by reference to Exhibit 4.2 of the Company's
registration statement on Form S-2 effective October 12, 1995.)
4.1 Rights Agreement dated as of January 27, 1992 between the Company and
Manufacturers Hanover Trust Company of California, Rights Agent.
(Incorporated by reference to Exhibit (C)1, in the Company's report on
Form 8-K filed February 10, 1992.)
4.2 Registration rights agreement by and among the Company and certain
former stockholders of VMW (Incorporated by reference to Exhibit 4.1 of
the Company's registration statement of Form S-3 effective July 26,
1996).
10.1 Lease Agreement for the Company's principal facility dated March 20,
1992, between Ames Avenue Associates and the Company, as amended.
(Incorporated by reference to Exhibit 10.1 of the Company's annual
report on 10-K for the year ending September 26, 1992.)
10.2 Form of Director and Officer Indemnity Agreement. (Incorporated by
reference to Exhibit 10.6 of the Company's registration statement on
Form S-1 effective July 25, 1990.)
10.3 1988 Stock Option Plan. (Incorporated by reference to Exhibit 10.14 of
the Company's registration statement on Form S-1 effective July 25,
1990.)
10.4 Patent Cross License Agreement dated May 17, 1989 with Zycad
Corporation. (Incorporated by reference from Zycad Corporation's Annual
Report on Form 10-K filed April 2, 1990.) (Incorporated by reference to
Exhibit 10.20 of the Company's registration statement on Form S-1
effective July 25, 1990.)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<C> <S> <C>
10.5 International Distributorship Agreement dated April 11, 1988, with C. Itoh
& Co., Ltd. (with certain confidential portions excised). (Incorporated
by reference to Exhibit 10.24 of the Company's registration statement on
Form S-1 effective July 25, 1990.)
10.6 OEM Software License Agreement between CAD Language Systems, Inc. and
IKOS Systems, Inc. dated June 22, 1989 and amendment dated September
1991. (Incorporated by reference to Exhibit 10.18 of the Company's Annual
Report for the year ended September 28, 1991.)
10.7 Technology Transfer and Joint Development Agreement with Racal-Redac,
Inc. dated July 1, 1993 (with certain portions excised). (Incorporated by
reference to Exhibit 10.19 of the Company's quarterly report on Form 10-Q
for the quarter ended July 3, 1993.)
10.8 Settlement Agreement and Release dated March 31, 1994 between Racal Redac,
Inc. and the Company. (Incorporated by reference to Exhibit 10.13 of the
Company's registration statement on Form S-2 effective October 12, 1995.)
10.9 Software License Agreement dated December 31, 1993 between Compass Design
Automation and the Company. (Incorporated by reference to Exhibit 10.17 of
the Company's quarterly report on Form 10-Q for the quarter ended January
1, 1994. )
10.10 Agreement dated June 2, 1994, between the Company and Gerald S. Casilli.
(Incorporated by reference to Exhibit 10.18 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.11 Agreement dated June 2, 1994, between the Company and Daniel R. Hafeman.
(Incorporated by reference to Exhibit 10.18 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.12 Agreement dated June 2, 1994, between the Company and Stephen M.
McLaughlin. (Incorporated by reference to Exhibit 10.18 of the Company's
quarterly report on Form 10-Q for the quarter ended July 2, 1994.)
10.13 Agreement dated June 2, 1994, between the Company and Lawrence A. Melling.
(Incorporated by reference to Exhibit 10.18 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.14 Agreement dated June 2, 1994, between the Company and Ramon A. Nunez.
(Incorporated by reference to Exhibit 10.18 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.15 Agreement dated June 2, 1994, between the Company and Joseph W. Rockom.
(Incorporated by reference to Exhibit 10.18 of the Company's quarterly
report on Form 10-Q for the quarter ended July 2, 1994.)
10.16 The Company's 1995 Outside Directors Stock Option Plan. (Incorporated by
reference to Exhibit 10.22 of the Company's registration statement on Form
S-2 effective October 12, 1995.)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<C> <S> <C>
10.17 Development and OEM Agreement for Verilog/IKOS Co-simulation Interface
dated August 26, 1994 by and between the Company and Precedence
Incorporated. (Incorporated by reference to Exhibit 10.24 of the
Company's registration statement on Form S-2 effective October 12, 1995.)
10.18 Amendment to OEM Agreement for the acquisition of certain software
technology, by and between Compass Design Automation, Inc. and the
Company dated December 27, 1995. (Incorporated by reference to Exhibit
10.19 of the Company's quarterly report on Form 10-Q for the quarter
ended December 30, 1995).
10.19 Amended and Restated Employment Agreement dated August 1, 1995 by and
between the Company and Ramon Nunez. (Incorporated by reference to
Exhibit 10.19 of the Company's quarterly report on Form 10-Q for the
quarter ended December 30, 1995).
10.20 Patent License Agreement between Massachusetts Institute Technology and
VMW
11.1 Statements of Computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on May 28, 1996, relating to the
acquisition of VMW. The Company described the acquisition under Item 2 of the
report - Acquisition or Disposition of Assets. The Pro forma financial
statements for such Form 8-K are incorporated by reference to the Company's
registration on Form S-3 effective June 26, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IKOS SYSTEMS, INC.
-----------------
Registrant
Date: August 13, 1996 /s/ Joseph W. Rockom
--------------- ---------------------
(JOSEPH W. ROCKOM, CFO)
Principal Financial Officer,
Duly Authorized Officer
13
<PAGE>
EXHIBIT 10.20
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
VIRTUAL MACHINE WORKS, INC.
PATENT LICENSE AGREEMENT
(EXCLUSIVE)
DATE: DECEMBER 22, 1993
[*]CONFIDENTIAL TREATMENT REQUESTED
-i-
<PAGE>
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
VIRTUAL MACHINE WORKS, INC.
PATENT AGREEMENT
This Agreement is made and entered into this 22st day of December, 1993,
(the "Effective Date") by and between MASSACHUSETTS INSTITUTE OF TECHNOLOGY, a
corporation duly organized and existing under the laws of the Commonwealth of
Massachusetts and having its principal office at 77 Massachusetts Avenue,
Cambridge, Massachusetts 02139, U.S.A. (hereinafter referred to as "M.I.T."),
and VIRTUAL MACHINE WORKS, INC. a corporation duly organized under the laws of
the State of Delaware and having its principal office at 66 Griffin Road,
Framingham, Massachusetts 01701 (hereinafter referred to as (LICENSEE").
WITNESSETH
----------
WHEREAS, M.I.T. is the owner of certain PATENT RIGHTS (as later defined
herein) relating to M.I.T. Case No. 6223 "Virtual Wires" by Ananr
----
Agarwal, Jonathan Babb, and Russell Tessier and has the right to grant licenses
under said PATENT RIGHTS, subject only to a royalty-free, nonexclusive license
heretofore granted to the United States Government.
WHEREAS, M.I.T. desires to have the PATENT RIGHTS developed and
commercialized to benefit the public and is willing to grant a license
thereunder.
WHEREAS, LICENSEE has represented to M.I.T., to induce M.I.T. to enter into
this Agreement, that LICENSEE is experienced in the design and development of
products similar to the LICENSED PRODUCT(s) (as later defined herein) and/or the
use of the LICENSED PROCESS(es) (as later defined herein) and that it shall
commit itself to a thorough, vigorous and diligent program of exploiting the
PATENT RIGHTS so that public utilization shall result therefrom; and
WHEREAS, LICENSEE desires to obtain a license under the PATENT RIGHTS upon
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto agree as follows:
[*]CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
1 - DEFINITIONS
---------------
For the purposes of this Agreement, the following words and phrases shall
have the following meanings:
1.1 "LICENSEE" shall include a related company of VIRTUAL MACHINE WORKS,
INC., the voting stock of which is directly or indirectly at least fifty percent
(50%) owned or controlled by VIRTUAL MACHINE WORKS, INC., an organization which
directly or indirectly controls more than fifty percent (50%) of the voting
stock of VIRTUAL MACHINE WORKS, INC. and an organization, the majority ownership
of which is directly or indirectly common to the ownership of VIRTUAL MACHINE
WORKS, INC.
1.2 "PATENT RIGHTS" shall mean all of the following M.I.T. intellectual
property:
a. the United States and foreign patents and/or patent applications
listed in Appendices A and B;
b. United States and foreign patents issued from the applications
listed in Appendices A and B and from divisionals and continuations
of these applications.
c. claims of U.S. and foreign continuation-in-part applications, and of
the resulting patents, which are directed to subject matter
specifically described in the U.S. and foreign applications listed
in Appendices A and B;
d. claims of all foreign patent applications, and of the resulting
patents, which are directed to subject matter specifically described
in the United States patents.
e. any reissues of United States and foreign patents described in a, b
or c above.
1.3 "OTHER PROPRIETARY RIGHTS" shall mean (a) copyrights, trademarks, and
mask works relating to M.I.T. Case no. 6223 "Virtual Wires" by Anant Agarwal,
----
Jonathon Babb, and Russell Tessier, and (b) any improvements on the rights
described in clause (a) of this paragraph and with respect to the PATENTS RIGHTS
provided these improvements are (1) dominated by the PATENT RIGHTS, (2) arising
from work in Anant Agarwal's laboratory at M.I.T., (3) reported to the M.I.T.
Technology Licensing Office within four (4) years of the Effective Date, and (4)
identified and requested by the LICENSEE within five (5) years of the Effective
Date. Any OTHER PROPRIETARY RIGHTS granted to LICENSEE shall be nonexclusive and
subject to any third party rights that have been granted prior to the time of
LICENSEE's request for these rights.
1.4 A "LICENSED PRODUCT" shall mean any product or part thereof which:
a. is covered in whole or in part by an issued, unexpired claim or a
pending claim contained in the PATENT RIGHTS or OTHER PROPRIETARY
RIGHTS in the country in which any such product or part thereof is
made, used or sold; or
[*]CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
2.11 LICENSEE shall not receive from sublicensees anything of value in lieu
of cash payments in consideration for any sublicense under this Agreement,
without the express prior written permission of M.I.T. Such permission will not
be unreasonably withheld.
2.12 The license granted hereunder shall not be construed to confer any
rights upon LICENSEE by implication, estoppel or otherwise as to any technology
nor specifically set forth in Appendices A and B hereof.
3-DUE DILIGENCE
---------------
3.1 LICENSEE shall use its best efforts to bring one or more LICENSED
PRODUCTS or LICENSED PROCESSES to market through a thorough, vigorous and
diligent program for exploitation of the PATENT RIGHTS and to continue active,
diligent marketing efforts for one or more LICENSED PRODUCTS or LICENSED
PROCESSES throughout the life of this Agreement.
3.2 In addition, LICENSEE shall adhere to the following milestones:
a. LICENSEE shall deliver to M.I.T. on or before December 31, 1993, a
business plan showing the amount of money, number and kind of
personnel and time budgeted and planned for each phase of
development of the LICENSED PRODUCTS and LICENSED PROCESSES and
shall provide similar reports to M.I.T. on or before December 31 of
each year.
b. LICENSEE shall develop a working model on or before July 1, 1994
and permit an in-plant inspection by M.I.T. on or before July 1,
1994 and thereafter permit in-plant inspections by M.I.T. at
regular intervals with at least Twelve (12) months between each
such inspection.
c. LICENSEE shall make NET SALES according to the following schedule:
1995 _________________
1996 _________________
1997 and each year thereafter _________________
3.3 LICENSEE's failure to perform in accordance with Paragraphs 3.1 and
3.2 above shall be grounds for M.I.T. to terminate this Agreement pursuant to
Paragraph 13.3 hereof.
4 - ROYALTIES
-------------
4.1 For the rights, privileges and license granted hereunder, LICENSEE
shall pay royalties to M.I.T. in the manner hereinafter provided to the end of
the term of the PATENT RIGHTS or until this Agreement shall be terminated:
a. Running Royalties in an amount equal to _______ percent (_______%)
of NET SALES of the LICENSED PRODUCTS and LICENSED PROCESSES
used, leased or sold by and/or for LICENSEE and/or its
sublicensees.
[*] CONFIDENTIAL TREATMENT REQUESTED
-5-
<PAGE>
b. In addition to Running Royalties, __________ Percent (________%) of
any other payments, including, but not limited to, sublicense issue
fees, received from sublicensees in consideration for the LICENSED
PRODUCTS and LICENSED PROCESSES.
c. Shares of common stock of LICENSEE for at least _____________
Percent (______%) of the total outstanding common and preferred
shares of LICENSEE issued to founders and/or reserved by LICENSEE
for key employees. (M.I.T. and LICENSEE anticipate that this
percentage will be diluted to approximately ______ percent (_____%)
of the outstanding shares as a result of equity investment of
approximately _____________________ Dollars _______________.
4.2 All payments due hereunder shall be paid in full, without deduction of
taxes or other fees which may be imposed by any government and which shall be
paid by LICENSEE.
4.3 No multiple royalties shall be payable because any LICENSED PRODUCT,
its manufacture, use, lease or sale are or shall be covered by more than one
PATENT RIGHTS patent application or PATENT RIGHTS patent licensed under this
Agreement.
4.4 Royalty payments shall be paid in United States dollars in Cambridge,
Massachusetts, or as such other place as M.I.T. may reasonable designate
consistent with the laws and regulations controlling in any foreign country. If
any currency conversion shall be required in connection with the payment of
royalties hereunder, such conversion shall be made by using the exchange rate
prevailing at the Chase Manhattan Bank (N.A.) on the last business day of the
calendar quarterly reporting period to which such royalty payments relate.
5 - REPORTS AND RECORDS
-----------------------
5.1 LICENSEE shall keep full, true and accurate books of account containing
all particulars that may be necessary for the purpose of showing the amounts
payable to M.I.T. hereunder. Said books of account shall be kept at LICENSEE's
principal place of business or the principal place of business of the
appropriate division of LICENSEE to which this Agreement relates. Said books and
the supporting data shall be open at all reasonable times for five (5) years
following the end of the calendar year to which they pertain to the inspection
of M.I.T. or its agents for the purpose of verifying LICENSEE's royalty
statement or compliance in other respects with this Agreement. Should such
inspection lead to the discovery of a greater than ten percent (10%) discrepancy
in reporting to M.I.T.'s detriment, LICENSEE agrees to pay the full cost of such
inspection.
5.2 Before the first commercial sale of a LICENSED PRODUCT or LICENSED
PROCESS, LICENSEE shall submit the reports due under Paragraph 3.2(a) on
December 31 of each year. After the first commercial sale of a LICENSED PRODUCT
or LICENSED PROCESS, LICENSEE, within sixty (60) days after March 31, June 30,
September 30 and December 31, of each year, shall deliver to M.I.T. true and
accurate reports, giving such particulars of the business
[*] CONFIDENTIAL TREATMENT REQUESTED
-6-
<PAGE>
conducted by LICENSEE and its sublicensees during the preceding three-month
period under this Agreement as shall be pertinent to a royalty accounting
hereunder. These shall include at least the following:
a. number of LICENSED PRODUCTS manufactured and sold by LICENSEE and
all sublicensees;
b. total billings for LICENSED PRODUCTS sold by LICENSEE and all
sublicensees;
c. deductions applicable as provided in Paragraph 1.5;
d. royalties due on additional payments from sublicensees under
Paragraph 4.1(b);
e. total royalties due; and
f. names and addresses of all sublicensees of LICENSEE; and
g. number of common and preferred shares outstanding; and
h. total number of dollars invested in LICENSEE.
5.3 With each such report submitted, LICENSEE shall pay to M.I.T. the
royalties due and payable under this Agreement. If no royalties shall be due,
LICENSEE shall so report.
5.4 On or before the ninetieth (90th) day following the close of
LICENSEE's fiscal year, LICENSEE shall provide M.I.T. with LICENSEE's certified
financial statements for the preceding fiscal year including, at a minimum, a
Balance sheet and an Operating Statement.
5.5 The royalty payments set forth in this Agreement and amounts due under
Article 6 shall, if overdue, bear interest until payment at a per annum rate
_____ percent (_____%) above the prime rate in effect at the Chase Manhattan
Bank (N.A.) on the due date. The payment of such interest shall not foreclose
M.I.T. from exercising any other rights it may have as a consequence of the
lateness of any payment.
6 - PATENT PROSECUTION
----------------------
6.1 M.I.T. shall apply for, seek prompt issuance of, and maintain during
the term of this Agreement the PATENT RIGHTS in the United States listed in
Appendix A hereto. The prosecution, filing and maintenance of all PATENT RIGHTS
patents and applications shall be the primary responsibility of M.I.T.;
provided, however, LICENSEE shall have reasonable opportunities to advise M.I.T.
and shall cooperate with M.I.T. in such prosecution, filing and maintenance.
6.2 Payment of all fees and costs relating to the filing, prosecution, and
maintenance of the PATENT RIGHTS shall be the responsibility of LICENSEE,
whether such fees and costs were incurred before or after the date of this
Agreement. LICENSEE shall be required to reimburse
[*] CONFIDENTIAL TREATMENT REQUESTED
-7-
<PAGE>
M.I.T. for all such fees and costs incurred before the Effective Date of this
Agreement from the first round financing, but not later than July 1, 1995.
LICENSEE shall reimburse M.I.T. for all fees and costs related to filing,
prosecution, and maintenance of the PATENT RIGHTS and OTHER PROPRIETARY RIGHTS
licensed in accordance with Paragraph 2.2 of this Agreement incurred during the
effective period of this Agreement as these costs are incurred.
6.3 M.I.T. will consult with LICENSEE before seeking any foreign patent
protection. If LICENSEE wants M.I.T. to seek such protection, M.I.T. shall
apply for that protection and LICENSEE shall reimburse M.I.T. for all fees and
costs as they are incurred.
7 - INFRINGEMENT
----------------
7.1 LICENSEE shall inform M.I.T. promptly in writing of any alleged
infringement of the PATENT RIGHTS by a third party and of any available evidence
thereof.
7.2 During the term of this Agreement LICENSEE shall have the right, but
shall not be obligated, to prosecute at its own expense all infringements in the
FIELD OF USE of the PATENT RIGHTS and, in furtherance of such right, M.I.T.
hereby agrees that LICENSEE may include M.I.T. as a party plaintiff in any such
suit without expense to M.I.T. The total cost of any such infringement action
commenced or defended solely by LICENSEE shall be borne by LICENSEE. LICENSEE
may, however, withhold up to _______ percent (_______%) of the payments
otherwise thereafter due M.I.T. under Article 4 hereunder and apply the same
toward reimbursement of up to half of LICENSEEs expenses, including reasonable
attorneys' fees, in connection therewith. Any recovery of damages by LICENSEE
for each such suit shall be applied first in satisfaction of any unreimbursed
expenses and legal fees of LICENSEE relating to such suit, and next toward
reimbursement of M.I.T. for any payments under Article 4 past due or withheld
and applied pursuant to this Article 7. The balance remaining from any such
recovery shall be divided equally between LICENSEE and M.I.T. No settlement,
consent judgment or other voluntary final disposition of the suit may be entered
into without the consent of M.I.T., which consent shall not unreasonably be
withheld. LICENSEE shall indemnify M.I.T. against any order for costs that may
be made against M.I.T. in such proceedings.
7.3 If within six (6) months after having been notified of any alleged
infringement, LICENSEE shall have been unsuccessful in persuading the alleged
infringer to desist and shall not have brought and shall not be diligently
prosecuting an infringement action, or if LICENSEE shall notify M.I.T. at any
time prior thereto of its intention not to bring suit against any alleged
infringer for the FIELD OF USE, then, and in those events only, M.I.T. shall
have the right, but shall not be obligated, to prosecute at its own expense any
infringement of the PATENT RIGHTS for the FIELD OF USE, and M.I.T. may, for such
purposes, use the name of LICENSEE as a party plaintiff in any such suit,
without expense to LICENSEE. The total cost of any such infringement
[*] CONFIDENTIAL TREATMENT REQUESTED
-8-
<PAGE>
action commenced or defended solely by M.I.T. shall be borne by M.I.T., and
M.I.T. shall keep any recovery or damages for past infringement derived
therefrom.
7.4 In the event that a declaratory judgment action alleging invalidity or
noninfringement of any of the PATENT RIGHTS shall be brought against LICENSEE,
M.I.T., at its option, shall have the right, within thirty (30) days after
commencement of such action, to intervene and take over the sole defense of the
action at its own expense.
7.5 In any infringement suit as either party may instititute to enforce
the PATENT RIGHTS pursuant to this Agreement, the other party hereto shall, at
the request and expense of the party initiating such suit, cooperate in all
respects and, to the extent possible, have its employees testify when requested
and make available relevant records, papers, information, samples, specimens,
and the like.
7.6 LICENSEE, during the exclusive period of this Agreement, shall have
the sole right in accordance with the terms and conditions herein to sublicense
any alleged infringer in the TERRITORY for the FIELD OF USE for future use of
the PATENT RIGHTS. Any upfront fees as part of such a sublicense shall be
shared equally between LICENSEE and M.I.T.; other royalties shall be treated per
Article 4.
8 - PRODUCT LIABILITY
---------------------
8.1 LICENSEE shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold M.I.T., its trustees, directors,
officers, employees and affiliates, harmless against all claims, proceedings,
demands and liabilities of any kind whatsoever, including legal expenses and
reasonable attorneys' fees, arising out of the death of or injury to any person
or persons or out of any damage to property, or resulting from the production,
manufacture, sale, use, lease, consumption or advertisement of the LICENSED
PRODUCT(s) and/or LICENSED PROCESS(es) or arising from any obligation of
LICENSEE hereunder.
8.2 LICENSEE shall obtain and carry in full force and effect commercial,
general liability insurance which shall protect LICENSEE and M.I.T. with respect
to events covered by Paragraph 8.1 above. Such insurance shall be written by a
reputable insurance company authorized to do business in the Commonwealth of
Massachusetts, shall list M.I.T. as an additional named insured thereunder,
shall be endorsed to include product liability coverage and shall require thirty
(30) days written notice to be given to M.I.T. prior to any cancellation or
material change thereof. The limits of such insurance shall not be less than
____________ Dollars ($____________) per occurrence with an aggregate of
___________ Dollars ($___________) for personal injury or death, and _______
Dollars ($___________) per occurrence with an aggregate of __________ Dollars
($___________) for property damage. LICENSEE shall provide M.I.T. with
Certificates of Insurance evidencing the same.
[*] CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE>
APPENDIX A
UNITED STATES PATENT RIGHTS
M.I.T. Case No. 6223
Title "Virtual Wires"
U.S.S.N. 0425,151
By Anant Agarwal, Jonathan Babb, and Russell Tessier
Filed on April 2, 1993
[*] CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
APPENDIX B
Foreign countries in which PATENT RIGHTS shall be filed, prosecuted and
maintained in accordance with Article 6:
For M.I.T. Case No. 6223
----
Europe
Canada
Japan
[*] CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
Exhibit 11.1
IKOS SYSTEMS, INC.
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
------------------ -----------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(7,416) $ 888 $(3,631) $2,051
======== ====== ======== ======
Number of shares used in
computing per share amounts:
Weighted average common
stock outstanding.................. 7,407 5,592 7,149 5,541
Common equivalent shares
attributable to stock
options (treasury stock method).... -- 689 -- 484
------ ------ ------ ------
Total weighted average
common shares outstanding......... 7,407 6,281 7,149 6,025
====== ====== ====== ======
Net income (loss) per share........... $(1.00) $ 0.14 $(0.51) $ 0.34
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-28-1996 SEP-28-1996
<PERIOD-START> APR-01-1996 OCT-01-1996
<PERIOD-END> JUN-29-1996 JUN-29-1996
<CASH> 9,131 9,131
<SECURITIES> 6,761 6,761
<RECEIVABLES> 4,492 4,492
<ALLOWANCES> 246 246
<INVENTORY> 2,570 2,570
<CURRENT-ASSETS> 22,927 22,927
<PP&E> 9,188 9,188
<DEPRECIATION> (6,390) (6,390)
<TOTAL-ASSETS> 32,088 32,088
<CURRENT-LIABILITIES> 10,350 10,350
<BONDS> 0 0
0 0
0 0
<COMMON> 75 75
<OTHER-SE> 20,764 20,764
<TOTAL-LIABILITY-AND-EQUITY> 32,088 32,088
<SALES> 9,874 26,845
<TOTAL-REVENUES> 11,850 32,281
<CGS> 2,126 6,109
<TOTAL-COSTS> 2,510 7,043
<OTHER-EXPENSES> 16,636 28,538
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 42
<INCOME-PRETAX> (7,006) (2,511)
<INCOME-TAX> 410 1,120
<INCOME-CONTINUING> (7,416) (3,631)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,416) (3,631)
<EPS-PRIMARY> (1.00) (0.51)
<EPS-DILUTED> (1.00) (0.51)
</TABLE>
