<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 April 4, 1998 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 8,448,000
---------------------------
(Title of Class) (Outstanding as of April 4, 1998)
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IKOS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED APRIL 4, 1998
INDEX
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<TABLE>
<CAPTION>
Part I: Financial Information
Item 1: Financial Statements
PAGE
<S> <C>
Consolidated Balance Sheets at
April 4, 1998 and September 27, 1997................ 3
Consolidated Statements of Income
for the three and six months ended
April 4, 1998 and March 29, 1997.................... 4
Consolidated Statements of Cash Flows
for the six months ended April 4, 1998
and March 29, 1997.................................. 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.................. 15
Signatures................................................. 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 Financial Statements
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
April 4, September 27,
1998 1997
----------- --------------
<S> <C> <C>
ASSETS (Unaudited) (1)
Current assets:
Cash and cash equivalents................................ $ 11,170 $ 9,486
Short-term investments................................... 9,874 15,329
Accounts receivable (net of allowances for
doubtful accounts of $551 and $501, respectively)....... 11,661 12,228
Inventories.............................................. 5,965 4,804
Deferred income taxes.................................... 3,450 3,450
Prepaid expenses and other assets........................ 1,277 659
-------- --------
Total current assets................................... 43,397 45,956
Equipment and leasehold improvements
Office and evaluation equipment......................... 4,325 3,684
Machinery and equipment................................. 8,485 7,328
Leasehold improvements.................................. 435 337
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13,245 11,349
Less allowances for depreciation and amortization...... (8,147) (7,080)
-------- --------
5,098 4,269
Intangible assets (net of amortization of
$2,394 and $1,681, respectively)........................ 4,404 4,626
Deferred income taxes.................................... 1,127 1,127
Other assets............................................. 833 572
-------- --------
$ 54,859 $ 56,550
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 2,286 $ 3,073
Accrued payroll and related expenses..................... 1,721 2,437
Accrued commissions...................................... 416 742
Income taxes payable..................................... 1,716 1,072
Other accrued liabilities................................ 1,519 1,551
Deferred revenues........................................ 5,714 5,123
Current portion of long-term debt........................ -- 350
-------- --------
Total current liabilities.............................. 13,372 14,348
Accrued rent.............................................. 185 212
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $.01 par value; 50,000 shares
authorized, 8,448 and 8,579 shares
issued and outstanding, respectively.................... 84 85
Additional paid-in capital............................... 55,884 57,442
Accumulated deficit...................................... (14,666) (15,537)
-------- --------
Total stockholders' equity............................. 41,302 41,990
-------- --------
$ 54,859 $ 56,550
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</TABLE>
(1) Derived from audited financial statements
See notes to consolidated financial statements.
3
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IKOS SYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
April 4, March 29, April 4, March 29,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues
Product.................................................. $ 9,162 $12,022 $18,244 $23,874
Maintenance.............................................. 3,157 2,453 6,140 4,790
------- ------- ------- -------
Total net revenues...................................... 12,319 14,475 24,384 28,664
Cost of revenues
Product.................................................. 2,723 2,678 5,178 5,370
Maintenance.............................................. 450 466 1,008 887
------- ------- ------- -------
Total cost of revenues ................................. 3,173 3,144 6,186 6,257
------- ------- ------- -------
Gross profit............................................ 9,146 11,331 18,198 22,407
Operating expenses:
Research and development................................. 3,199 2,509 6,048 4,860
Sales and marketing...................................... 4,316 3,758 8,780 7,958
General and administration............................... 901 1,075 1,872 2,103
Amortization of intangibles.............................. 377 315 713 630
------- ------- ------- -------
Total operating expenses................................ 8,793 7,657 17,413 15,551
------- ------- ------- -------
Income from operations.................................... 353 3,674 785 6,856
Other income (expense):
Interest income.......................................... 296 285 616 562
Other.................................................... -- 34 -- 65
------- ------- ------- -------
Total other income...................................... 296 319 616 627
------- ------- ------- -------
Income before provision for income taxes.................. 649 3,993 1,401 7,483
Provision for income taxes................................ 245 1,478 530 2,793
------- ------- ------- -------
Net income.............................................. $ 404 $ 2,515 $ 871 $ 4,690
======= ======= ======= =======
Basic net income per share................................ $ 0.05 $ 0.30 $ 0.10 $ 0.56
======= ======= ======= =======
Common and common equivalent shares used
in computing per share amounts........................... 8,435 8,378 8,468 8,310
======= ======= ======= =======
Dilutive net income per share............................. $ 0.05 $ 0.28 $ 0.10 $ 0.53
======= ======= ======= =======
Common and common equivalent shares used
in computing per share amounts........................... 8,695 8,984 8,704 8,920
======= ======= ======= =======
</TABLE>
All share and per share data have been adjusted retroactively to comply with the
requirements of Financial Accounting Standards Board Statement No. 128
"Earnings Per Share."
See notes to consolidated financial statements.
4
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IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents in thousands
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
April 4, March 29,
1998 1997
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<S> <C> <C>
Operating activities:
Net income........................................................... $ 871 $ 4,690
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization....................................... 1,780 1,292
Gain on retirement of equipment..................................... -- 13
Deferred income taxes............................................... -- (2)
Deferred rent....................................................... (27) (11)
Changes in operating assets and liabilities:
Accounts receivable................................................. 567 (2,863)
Inventories......................................................... (1,161) (420)
Prepaid expenses and other current assets........................... 12 58
Other assets........................................................ (261) (226)
Accounts payable.................................................... (787) (3,138)
Accrued payroll and other expenses.................................. (716) (401)
Accrued commissions................................................. (326) (280)
Income taxes payable................................................ 644 2,615
Other accrued liabilities........................................... (32) 381
Deferred revenues................................................... 591 (490)
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Net cash provided by operating activities.......................... 1,155 1,218
Investing activities:
Purchases of equipment and leasehold improvements.................... (1,887) (905)
Acquisition of Deerbrook Systems, Inc................................. (500) --
Other investments.................................................... (630)
Purchase of short-term investments................................... (8,921) (13,551)
Maturities of short-term investments................................. 14,376 16,105
------- --------
Net cash provided by investment activities......................... 2,438 1,649
Financing activities:
Principal payments on long-term borrowings........................... (350) (450)
Net sales (repurchases) of common stock.............................. (1,559) 1,311
------- --------
Net cash provided by (used in) financing activities............... (1,909) 861
------- --------
Increase in cash and cash equivalents................................. 1,684 3,728
Cash and cash equivalents at beginning of period...................... 9,486 10,590
------- --------
Cash and cash equivalents at end of period............................ $11,170 $ 14,318
======= ========
</TABLE>
See notes to consolidate financial statements.
5
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IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements at April 4, 1998 and for
the three and six month periods ended April 4, 1998 and March 29, 1997,
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 27, 1997 included in the Form 10-K as filed with the
Securities and Exchange Commission on December 19, 1997. The unaudited
interim financial information reflects all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented. The results for the three and
six month periods ended April 4, 1998 are not necessarily indicative of
results expected for the full year.
2. FISCAL YEAR
The Company is on a 52-53 week fiscal year. Fiscal year 1998 is a 53-week
year and the three-month period ending January 3, 1998 included the
additional week for the fiscal year.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of (in thousands):
<TABLE>
<CAPTION>
April 4, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Raw materials $1,444 $1,979
Work-in-process 1,739 1,385
Finished goods 2,782 1,440
------ ------
$5,965 $4,804
====== ======
</TABLE>
6
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IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
--------------------------------------------------------------
April 4, March 29, April 4, March 29,
1998 1997 1998 1997
-------- --------- -------- ---------
BASIC EARNINGS PER SHARE:
<S> <C> <C> <C> <C>
Net income $ 404 $2,515 $ 871 $4,690
====== ====== ====== ======
Weighted average common shares outstanding 8,435 8,378 8,468 8,310
====== ====== ====== ======
Basic net income per share $ 0.05 $ 0.30 $ 0.10 $ 0.56
====== ====== ====== ======
DILUTIVE EARNINGS PER SHARE:
Net income $ 404 $2,515 $ 871 $4,690
====== ====== ====== ======
Number of shares used in computing per share amounts:
Weighted average common shares outstanding 8,435 8,378 8,468 8,310
Common equivalent shares attributable to stock
options (treasury stock method) 260 606 236 610
------ ------ ------ ------
Total weighted average common shares outstanding 8,695 8,984 8,704 8,920
====== ====== ====== ======
Dilutive net income per share $ 0.05 $ 0.28 $ 0.10 $ 0.53
====== ====== ====== ======
</TABLE>
5. TECHNOLOGY ACQUISITION
In January 1998, the Company entered into a letter of intent to acquire
certain technology and research and development expertise from Interra,
Inc. and its affiliate, Delsoft India Pvt. Limited. In May 1998, the
Company expects to complete the acquisition. The basis of the transaction
is to provide the Company with engineering resources and technology for
approximately $8,500,000 in cash and stock of which approximately $608,000
has already been paid. In connection with the acquisition, the Company has
established a research and development facility in India. The transaction
will be accounted for under the purchase method of accounting and the
Company expects recognize a charge in its fiscal third quarter related to
acquired in-process research and development.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements in this Quarterly Report on Form 10-Q are made
pursuant to the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended. In this report, the words "anticipates," "believes,"
"expects," "future," "intends'" and similar expressions identify forward-looking
statements. Investors are cautioned that all forward-looking statements involve
risks and uncertainties, including, without limitation, those contained under
the section entitled "Factors That May Affect Future Results of Operations" and
other risks detailed from time to time in the Company's periodic reports and
other information filed with the Securities and Exchange Commission. Actual
events and results may differ materially from the Company's current expectations
and beliefs.
NET REVENUES
Net revenues for the three and six months ended April 4, 1998 totaled
$12,319,000 and $24,384,000, respectively, representing a decrease of
approximately 15% from the same periods in fiscal 1997. The decreases were
primarily the result of the decline in the sales of the Company's Voyager
simulation product line due in part to delays in the introduction of new
simulation products and increased focus on the Company's emulation product line
and consulting services. Emulation revenues increased from approximately
$1,000,000 and $2,505,000 during the second quarter and first six months of
fiscal 1997 to over $2,600,000 and $4,600,000, respectively, for the same
periods of fiscal 1998. The increases are a result of the increased focus on
the emulation business as well as increased acceptance in the marketplace for
the Company's emulation product offering. Consulting services increased from
approximately $950,000 and $1,170,000 during the second quarter and first six
months of fiscal 1997 to over $1,575,000 and $2,904,000, respectively, for the
same periods in 1998. The Company's aggressive pursuit of providing value added
consulting service to new and existing customers is the main reason for the
increases.
International sales for the three and six months ended April 4, 1998 totaled
$4,382,000 and $8,846,000, a decrease of approximately 12% and approximately
21%, respectively from the same periods in fiscal 1997. The decrease is due in
part to the decline in sales activity in the Asian marketplace resulting from
the economic issues in that location and also as a result of the overall decline
in sales of the Company's simulation products.
GROSS PROFIT MARGINS
Gross profit margin for the three and six month periods ended April 4, 1998 were
approximately 74% and 75% of net revenues, respectively and are lower when
compared to the approximately 78% for the same periods of fiscal 1997. The
decrease in margins are a result of the lower than expected revenues resulting
in less coverage of fixed manufacturing costs and the increase in the consulting
services personnel costs which increased the level of fixed costs charged
against margins.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and six months ended April 4,
1998 totaled $3,199,000 and $6,048,000, representing an increase of
approximately 28% and 24%, respectively, when compared to the same periods in
fiscal 1997. The increases during the quarter and for the six months is a
result of increased outside consulting charges and certain non-recurring
engineering charges as well as increased depreciation expenses. The Company
expects research and development expenses to continue to increase over the
remainder of the year as the Company continues its on-going development efforts
for enhancing its current products and for new product technology development.
8
<PAGE>
SALES AND MARKETING EXPENSES
Sales and marketing expenses totaled $4,316,000 and $8,780,000 for three and six
month periods ended April 4, 1998, representing an increase of approximately 15%
and 10%, respectively, when compared to the same periods in fiscal 1997. The
increases are primarily the result of additional headcount offset by decreased
commissions as a result of lower revenue levels. Sales and marketing expenses
are expected to continue to increase in absolute dollars over the remainder of
the year reflecting increased headcount, commission expense and marketing
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $901,000 and $1,872,000 for the three
and six month periods ended April 4, 1998 and were lower when compared to
$1,075,000 and $2,103,000 for the same three and six month periods in fiscal
1997. The decrease is primarily due to decreased profit sharing expenses as a
result of lower profit levels. General and administrative expenses are expected
to remain relatively flat over the remainder of fiscal 1998.
INCOME TAXES
The Company's effective tax rate for the three and six month periods ended April
4, 1998 was 38% as compared to an effective tax rate of 37% for the same periods
in fiscal 1997. The increase in the rate in 1998 is primarily attributable to
the increase in non-deductible goodwill amortization as a percentage of pre-tax
income when compared to the amounts recorded in 1997.
Other
The Company has experienced minimal gains or losses on foreign currency
translation since substantially all of its international sales to date have been
billed and collected in U.S. dollars. The Company pays the expenses of its
international operations in local currencies and to date the Company has not
engaged in hedging transactions with respect to such obligations. The Company
has reorganized its operations at its Japan subsidiary and is engaging in
transactions in the Japanese local currency. As such, the Company has entered
into hedging arrangements to mitigate the currency risk with respect to such
transactions. Through April 4, 1998, such hedging arrangements have been
immaterial to the Company operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
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, a significant portion of the Company's revenue may 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
9
<PAGE>
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 increase or that the Company
will remain profitable in any future period.
Increased Sales and Development of the Company's 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. The Company has seen a decline in
such revenues and there can be no assurance the decline in these product's
revenues will reverse. Increased sales of the Company's hardware-assisted
simulation products for the verification of IC and system designs is expected to
depend on the introduction of new simulation products and methodologies.
Furthermore, increased sales will also depend on an increasing number of complex
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. 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.
In addition to the Company's simulation product line the Company has focused
certain of its resources on its emulation product line. The Company's initial
emulation product was commercially released in the first quarter of fiscal 1997.
While the Company has seen increases in its emulation revenues, there can be no
assurance that the product will adequately meet the requirements of the
marketplace. In addition, there continues to be further development of the
emulation product. As the Company continues to develop emulation products which
are based on a new technology concept, there can be no assurance that the
enhancement of current products or other developed products resulting from this
development will provide the necessary solutions to customer design verification
needs, be of acceptable quality or achieve further market acceptance. The
success of the Company in developing, introducing, selling and supporting
emulation products will depend on a variety of factors including but not limited
to the timely and successful enhancement of current products, completion of
product design and development of future products, the 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 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 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 has or 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 emulation 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, or even if such market expands, that
the Company's products will achieve the market acceptance required to maintain
revenue growth and continued profitability.
10
<PAGE>
In January 1998, the Company entered into a letter of intent to acquire certain
technology and research and development expertise from Interra, Inc., and its
affiliate, Delsoft India Pvt. Limited. In May 1998, the Company expects to
complete the acquisition. While the Company expects that the technology acquired
and the resources obtained in this transaction will assist the Company in
meeting its new product introduction goals and deadlines, there can be no
assurances that such goals or deadlines will be achieved in a timely manner.
Furthermore, should such goals and deadlines for the introduction of new
products be attained, there can be no assurances that the resulting new products
will adequately meet the requirements of the marketplace.
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. The Company currently experiences
competition from traditional software verification methodologies, including
product offerings sold by Cadence, Synopsis and Mentor Graphics. The Company's
main competition for emulation systems are those sold by Quickturn. 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,
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.
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 and emulation 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 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
11
<PAGE>
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 for any particular quarter.
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.
Dependence Upon Certain Suppliers - Certain key components used in the Company's
- ---------------------------------
products are presently available from sole or limited sources. The inability to
develop alternative sources for these sole or limited source components or to
obtain sufficient quantities of these components could result in delays or
reductions in product shipments which could adversely affect the Company's
operating results. The Company's systems use proprietary ASICs and FPGAs that
are currently manufactured solely by American Microsystems, Inc. ("AMI") and
Xilinx, Inc. ("Xilinx"), respectively.
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 its 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.
Customer Concentration - A relatively limited number of customers have
- ----------------------
historically accounted for a substantial portion of the Company's net revenues.
During fiscal 1997 and 1996, sales to the Company's top ten customers accounted
for approximately 52% and 65%, 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.
12
<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. The Company's cash, cash equivalents and short-term
investments decreased to $21,044,000 at April 4, 1998 from $24,815,000 at
September 27, 1997. The decrease was a result of $1,155,000 cash provided by
operating activities offset by $3,017,000 used in investing activities and
$1,909,000 of cash used in financing activities.
Operating Activities - The Company's operating activities provided cash of
- --------------------
$525,000 during the first six months of fiscal 1998. The $1,155,000 cash
provided by operations was primarily due to net income adjusted for depreciation
and amortization, a decrease in accounts receivable and increases in income
taxes payable and deferred revenues offset by increases in inventory, other
assets and payments on accounts payable, accrued payroll and accrued commission
balances.
Investing Activities - Net cash provided by investing activities for the six
- --------------------
months ending April 4, 1998 was $3,068,000. The primary source of cash during
this period was the net maturities of short-term investments totaling
$5,455,000. The increase in cash equivalents from these maturities was the
result of the investment in higher yielding cash equivalent securities rather
than certain short-term investments. This source of cash from investment
activities was offset by approximately $1,887,000 in capital expenditures and
$500,000 related to the acquisition of Deerbrook Systems, Inc. For each period
presented, capital expenditures were primarily for evaluation equipment and
engineering workstations.
Financing Activities Net cash used in financing activities for the six months
- --------------------
ended April 4, 1998 was primarily related to the net purchases of stock during
the six-month period. During the six-month period, the Company announced its
intention to repurchase up to 1,000,000 shares of its outstanding common stock
on the open market. Through April 4, 1998, the Company had repurchased
approximately 214,000 shares at a weighted-average per share price of $8.12. In
addition, the Company repaid its remaining principal debt obligations totaling
$350,000.
The Company's primary unused sources of funds at April 4, 1998 consisted of
$11,170,000 of cash and cash equivalents, in addition to $9,874,000 of short-
term investments. The Company believes that current cash, cash equivalents and
short-term investments, together with cash and cash equivalents generated from
operations, will be sufficient to finance its operations for at least the next
twelve months.
13
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-3 Not applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on January 27, 1998.
The stockholders approved a proposal to elect the Board of Directors of the
Company to serve for the ensuing fiscal year. The proposal received the
following votes:
<TABLE>
<CAPTION>
FOR AGAINST
--- -------
<S> <C> <C>
Gerald S. Casilli 7,289,467 316,859
Lutz P. Henckels 7,289,667 316,659
Ramon A. Nunez 7,291,067 315,259
James R. Oyler 7,290,367 315,959
Glenn E. Penisten 7,288,467 317,859
</TABLE>
The stockholders approved a proposal to increase the number of shares of the
Company's Common Stock reserved for issuance under its 1995 Stock Option Plan by
430,000 shares. The proposal received the following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
2,379,926 2,262,177 23,750 2,940,473
</TABLE>
The stockholders approved a proposal to increase automatically, on the first day
of each fiscal year of the Company beginning on and after October 4, 1998, the
maximum aggregate number of shares of Common Stock issuable under the Company's
1995 Stock Option Plan by that number of shares of Common Stock of the Company
equal to 4.9% of the number of shares of the Company issued and outstanding on
the last day of the preceding fiscal year. The proposal received the following
votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
2,439,812 2,239,979 30,073 2,896,462
</TABLE>
The stockholders approved a proposal to increase by 150,000 shares the maximum
aggregate number of shares of Common Stock issuable under the Company's Employee
Stock Purchase Plan. The proposal received the following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
4,285,909 399,376 24,579 2,896,462
</TABLE>
In addition, stockholders ratified the appointment of Ernst & Young LLP as
independent public accountants of the Company for the fiscal year ending October
3, 1998. The proposal received the following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
7,537,246 45,026 24,054 0
</TABLE>
14
<PAGE>
ITEM 5 Not applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) INDEX TO EXHIBITS
Exh. No. Documentation Description
- ------- -------------------------
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 (Incorporation 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).
3.4 Certificate of Amendment of Certificate of Incorporation filed
February 3. 1997 (Incorporated by reference to Exhibit 3.4 of the
Company's quarterly report on Form 10-Q for the quarter ending March
29, 1997).
3.5 By laws (Incorporated by reference to Exhibit 3.2 of the Company's
registration statement on Form S-1 effective July 25, 1990).
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).
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).
15
<PAGE>
Exh. No. Documentation Description
- ------- -------------------------
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 to Exhibit 10.20 of the
Company's registration statement on Form S-1 effective July 25, 1990).
10.5 International Distributorship Agreement dated April 11, 1988, with C.
Itoh & Co., Ltd. (Incorporated by reference to Exhibit 10.24 of the
Company's registration statement on Form S-1 effective July 25, 1990).
Confidential Treatment has been granted as to certain portions of this
Exhibit.
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 (Incorporated by reference to Exhibit 10.19
of the Company's quarterly report on Form 10-Q for the quarter ended
July 3, 1993). Confidential Treatment has been granted as to certain
portions of this Exhibit.
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 with Compass Design Automation dated
December 31, 1993 (Incorporated by reference to Exhibit 10.17 of the
Company's quarterly report on Form 10-Q for the quarter ended January
1, 1994).
10.10 Agreement dated June 2, 1994, by and 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, by and 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).
16
<PAGE>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
10.12 Agreement dated June 2, 1994, by and between the Company and Stephen
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, by and between the Company and Larry 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, by and 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, by and 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).
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
10.20 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 10.21 of the Company's quarterly report on Form 10-Q for the
quarter ended December 30, 1995).
10.20 Patent License Agreement dated December 22, 1993 between Massachusetts
Institute of Technology and the Company (Incorporated by reference to
Exhibit 10.20 of the Company's quarterly report on Form 10-Q for the
quarter ended June 29, 1996). Confidential treatment has be granted as
to certain portions of this Exhibit.
17
<PAGE>
Exh. No. Documentation Description
- ------- -------------------------
10.21 The Company's 1995 Stock Option Plan, as amended.
10.22 The Company's 1996 Employee Stock Purchase Plan, as amended
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
NONE
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: May 11, 1998 /s/ Joseph W. Rockom
------------------------------
(JOSEPH W. ROCKOM CFO)
Principal Financial Officer,
Duly Authorized Officer
18
<PAGE>
EXHIBIT 10.21
IKOS SYSTEMS, INC.
1995 STOCK OPTION PLAN
(As Amended by the Board through November 12, 1997)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The IKOS Systems, Inc. 1988 Stock Option Plan was
initially established effective as of January 19, 1988 (the "INITIAL PLAN").
The Initial Plan is hereby amended and restated in its entirety as the IKOS
Systems, Inc. 1995 Stock Option Plan (the "PLAN") effective as of October 26,
1995 (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Participating Company Group and its stockholders by providing an incentive to
attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of
its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Incentive Stock Options shall
be granted, if at all, within ten (10) years from the Effective Date.
Notwithstanding the foregoing, if the maximum number of shares of Stock issuable
pursuant to the Plan as provided in Section 4.1 has been increased at any time,
all Incentive Stock Options shall be granted, if at all, no later than the last
day preceding the tenth (10th) anniversary of the earlier of (a) the date on
which the latest such increase in the maximum number of shares of Stock issuable
under the Plan was approved by the stockholders of the Company or (b) the date
such amendment was adopted by the Board.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or more
Committees have been appointed by the Board to administer the Plan, "Board"
also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended, and any
applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other committee of
the Board duly appointed to administer the Plan and having such powers as
shall be specified by the Board. Unless the powers of the Committee have
been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend
or terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means IKOS Systems, Inc., a Delaware corporation, or any
successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor, engaged by a
Participating Company to render services other than as an Employee or a
Director.
<PAGE>
(f) "DIRECTOR" means a member of the Board or of the board of directors
of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of
a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a share of
stock or other property as determined by the Board, in its sole discretion,
or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(j) "INCENTIVE STOCK OPTION" means an Option intended to be (as set
forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(k) "INSIDER" means an officer or a Director of the Company or any
other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as
set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(m) "OPTION" means a right to purchase Stock (subject to adjustment as
provided in Section 4.2) pursuant to the terms and conditions of the Plan.
An Option may be either an Incentive Stock Option or a Nonstatutory Stock
Option.
(n) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee setting forth the terms, conditions and restrictions of the
Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(o) "OPTIONEE" means a person who has been granted one or more Options.
(p) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(q) "PARTICIPATING COMPANY" means the Company or any Parent Corporation
or Subsidiary Corporation.
(r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.
(s) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as amended
from time to time, or any successor rule or regulation.
(t) "SECTION 162(M)" means Section 162(m) of the Code, as amended by
the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(u) "STOCK" means the common stock of the Company, as adjusted from
time to time in accordance with Section 4.2.
(v) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
<PAGE>
(w) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an
Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
a Participating Company within the meaning of Section 422(b)(6) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 POWERS OF THE BOARD. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at which,
Options shall be granted and the number of shares of Stock to be subject to each
Option;
(b) to designate Options as Incentive Stock Options or Nonstatutory
Stock Options;
(c) to determine the Fair Market Value of shares of Stock or other
property;
(d) to determine the terms, conditions and restrictions applicable to
each Option (which need not be identical) and any shares acquired upon the
exercise thereof, including, without limitation, (i) the exercise price of the
Option, (ii) the method of payment for shares purchased upon the exercise of the
Option, (iii) the method for satisfaction of any tax withholding obligation
arising in connection with the Option or such shares, including by the
withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the exercisability of any
Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
employment or service with the Participating Company Group;
<PAGE>
(h) to delegate to the Chief Executive Officer or the Chief Financial
Officer of the Company the authority to grant one or more Options, without
further approval of the Board, to any person eligible pursuant to Section 5,
other than a person who, at the time of such grant, is an Insider; provided,
however, that (i) such Options shall not be granted to any one person within any
fiscal year of the Company for more than 2,000 shares in the aggregate, (ii) the
exercise price per share of each such Option shall be equal to 100% of the
closing price per share of the Stock on the date of grant (or, if no price is
reported for such date, on the last day preceding the date of grant on which
such price is reported) as quoted on the National Association of Securities
Dealers Automated Quotation System (or the average of the closing bid and asked
prices if the shares of Stock are so quoted instead), or as reported on such
other stock exchange or market system which constitutes the primary market for
the Stock, and (iii) each such Option shall be subject to the terms and
conditions of the appropriate standard form of Option Agreement approved by the
Board and shall conform to the provisions of the Plan and such other guidelines
as shall be established from time to time by the Board;
(i) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of,
the Plan, including, without limitation, as the Board deems necessary or
desirable to comply with the laws of, or to accommodate the tax policy or custom
of, foreign jurisdictions whose citizens may be granted Options; and
(j) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
3.3 DISINTERESTED ADMINISTRATION. With respect to participation by
Insiders in the Plan, at any time that any class of equity security of the
Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall
be administered in compliance with the "disinterested administration"
requirements of Rule 16b-3, if any.
3.4 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating Company
is a "publicly held corporation" within the meaning of Section 162(m), the Board
may establish a Committee of "outside directors" within the meaning of Section
162(m) to approve the grant of any Option which might reasonably be anticipated
to result in the payment of employee remuneration that would otherwise exceed
the limit on employee remuneration deductible for income tax purposes pursuant
to Section 162(m).
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided
in Section 4.2, the maximum aggregate number of shares of Stock that may be
issued under the Plan shall be three million seven hundred seventy-two thousand
eight hundred fifty-seven (3,772,857), increased on the first day of each fiscal
year of the Company beginning on and after October 4, 1998 by a number of shares
equal to four and nine tenths percent (4.9%) of the number of shares of Stock
issued and outstanding on the last day of the immediately preceding fiscal year,
and shall consist of authorized but unissued or reacquired shares of Stock or
any combination thereof. Notwithstanding the foregoing, except as adjusted
pursuant to Section 4.2, in no event shall more than three million seven hundred
seventy-two thousand eight hundred fifty-seven (3,772,857) shares of Stock be
cumulatively available for issuance pursuant to the exercise of Incentive Stock
Options (the "ISO SHARE ISSUANCE LIMIT"). If an outstanding Option for any
reason expires or is terminated or canceled or shares of Stock acquired, subject
to repurchase, upon the exercise of an Option are repurchased by the Company,
the shares of Stock allocable to the unexercised portion of such Option, or such
repurchased shares of Stock, shall again be available for issuance under the
Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan, to the ISO Share Issuance Limit, to the Section 162(m) Grant Limit
set forth in Section 5.4 and to any outstanding Options, in the Section 162(m)
Grant Limit set forth in Section 5.5, in
<PAGE>
the ISO Share Issuance Limit set forth in Section 4.1, and in the exercise price
per share of any outstanding Options. If a majority of the shares which are of
the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Options to provide that such Options are exercisable for New Shares. In the
event of any such amendment, the number of shares subject to, and the exercise
price per share of, the outstanding Options shall be adjusted in a fair and
equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded up or down to the nearest whole
number, as determined by the Board, and in no event may the exercise price of
any Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option.
5.2 DIRECTORS SERVING ON COMMITTEE. At any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, no member of a Committee established to administer the Plan in compliance
with the "disinterested administration" requirements of Rule 16b-3, if any,
while a member, shall be eligible to be granted an Option.
5.3 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the
effective date of the grant of an Option to such person may be granted only a
Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.4 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate Fair
Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.4, options designated as Incentive
Stock Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of stock shall be determined as of the time
the option with respect to such stock is granted. If the Code is amended to
provide for a different limitation from that set forth in this Section 5.4, such
different limitation shall be deemed incorporated herein effective as of the
date and with respect to such Options as required or permitted by such amendment
to the Code. If an Option is treated as an Incentive Stock Option in part and
as a Nonstatutory Stock Option in part by reason of the limitation set forth in
this Section 5.4, the Optionee may designate which portion of such Option the
Optionee is exercising and may request that separate certificates representing
each such portion be issued upon the exercise of the Option. In the absence of
such designation, the Optionee shall be deemed to have exercised the Incentive
Stock Option portion of the Option first.
5.5 SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided in
Section 4.2, no Employee shall be granted one or more Options within any fiscal
year of the Company which in the aggregate are for the purchase of more than
seven hundred fifty thousand (750,000) shares (the "SECTION 162(M) GRANT
LIMIT"). An Option which is canceled in the same fiscal year of the Company in
which it was granted shall continue to be counted against the Section 162(m)
Grant Limit for such period.
<PAGE>
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Option shall be not less than the Fair Market
Value of a share of Stock on the effective date of grant of the Option and (b)
no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an
exercise price per share less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if (a) such Option is granted pursuant to
an assumption or substitution for another option in a manner qualifying under
the provisions of Section 424(a) of the Code, or (b) such Option is deemed to
have been granted as a consequence of an amendment (other than an amendment of
the exercise price) made to an outstanding Option, the exercise price of which
is less than the minimum exercise price set forth above on the date of such
deemed option grant.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or times,
or upon such event or events, and subject to such terms, conditions, performance
criteria, and restrictions as shall be determined by the Board and set forth in
the Option Agreement evidencing such Option; provided, however, that (a) no
Incentive Stock Option shall be exercisable after the expiration of ten (10)
years after the effective date of grant of such Option, (b) no Incentive Stock
Option granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
and (c) no Option granted to a prospective Employee or prospective Consultant
may become exercisable prior to the date on which such person commences service
with a Participating Company.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided
below, payment of the exercise price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check, or cash
equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not
be exercised by tender to the Company of shares of Stock to the extent such
ender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all times, the
right, in the Company's sole and absolute discretion, to establish, decline to
approve or terminate any program or procedures for the exercise of Options by
means of a Cashless Exercise.
<PAGE>
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted
if the exercise of an Option using a promissory note would be a violation of any
law. Any permitted promissory note shall be on such terms as the Board shall
determine at the time the Option is granted. The Board shall have the authority
to permit or require the Optionee to secure any promissory note used to exercise
an Option with the shares of Stock acquired upon the exercise of the Option or
with other collateral acceptable to the Company. Unless otherwise provided by
the Board, if the Company at any time is subject to the regulations promulgated
by the Board of Governors of the Federal Reserve System or any other
governmental entity affecting the extension of credit in connection with the
Company's securities, any promissory note shall comply with such applicable
regulations, and the Optionee shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a
right of first refusal, one or more repurchase options, or other conditions and
restrictions as determined by the Board in its sole discretion at the time the
Option is granted. The Company shall have the right to assign at any time any
repurchase right it may have, whether or not such right is then exercisable, to
one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
7. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at
the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Incentive Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board at
the time the Option is granted, an Option designated as a "Nonstatutory Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Nonstatutory Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in Section 6.2
or by the Board in the grant of an Option, any Incentive Stock Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority from time
to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan. Such authority shall include, but not
by way of limitation, the authority to grant Options which are
<PAGE>
immediately exercisable subject to the Company's right to repurchase any
unvested shares of Stock acquired by an Optionee upon the exercise of an Option
in the event such Optionee's employment or service with the Participating
Company Group is terminated for any reason, with or without cause.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any
of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a Transfer
of Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"),
may either assume the Company's rights and obligations under outstanding Options
or substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. In the event the Acquiring Corporation elects not
to assume or substitute for outstanding Options in connection with a Transfer of
Control, any unexercisable or unvested portion of the outstanding Options shall
be immediately exercisable and vested in full as of the date ten (10) days prior
to the date of the Transfer of Control. The exercise or vesting of any Option
that was permissible solely by reason of this Section 8.2 shall be conditioned
upon the consummation of the Transfer of Control. Any Options which are neither
assumed or substituted for by the Acquiring Corporation in connection with the
Transfer of Control nor exercised as of the date of the Transfer of Control
shall terminate and cease to be outstanding effective as of the date of the
Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within
<PAGE>
the meaning of Section 1504(a) of the Code without regard to the provisions of
Section 1504(b) of the Code, the outstanding Options shall not terminate unless
the Board otherwise provides in its sole discretion.
9. PROVISION OF INFORMATION. Each Optionee shall be given access to
------------------------
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
-----------------------------
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
Notwithstanding the foregoing, a Nonstatutory Stock Option shall be assignable
or transferable to the extent permitted by the Board and set forth in the Option
Agreement evidencing such Option.
11. INDEMNIFICATION. In addition to such other rights of indemnification as
---------------
they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
--------------------------------
Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no expansion in the class of persons
eligible to receive Nonstatutory Stock Options. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option or any
unexercised portion thereof, without the consent of the Optionee, unless such
termination or amendment is required to enable an Option designated as an
Incentive Stock Option to qualify as an Incentive Stock Option or is necessary
to comply with any applicable law or government regulation.
13. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS. Any other
------------------------------------------------------
provision of the Plan to the contrary notwithstanding, the terms of the Initial
Plan shall remain in effect and apply to all Options granted pursuant to the
Initial Plan.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing is the IKOS Systems, Inc. 1995 Stock Option Plan as duly adopted
by the Board on October 26, 1995 and amended by the Board through November 12,
1997.
/s/ Joseph W. Rockom
-----------------------------
Secretary
<PAGE>
EXHIBIT 10.22
IKOS SYSTEMS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED BY THE BOARD THROUGH NOVEMBER 12, 1997)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The IKOS Systems, Inc. 1996 Employee Stock Purchase
Plan (the "PLAN") is hereby established effective upon its approval by the
stockholders of the Company.
1.2 PURPOSE. The purpose of the Plan is to provide Eligible Employees of
the Participating Company Group with an opportunity to acquire a proprietary
interest in the Company through the purchase of Stock. The Company intends that
the Plan shall qualify as an "employee stock purchase plan" under Section 423 of
the Code (including any amendments or replacements of such section), and the
Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of
its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Any term not expressly defined in the Plan but defined
for purposes of Section 423 of the Code shall have the same definition herein.
Whenever used herein, the following terms shall have their respective meanings
set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or more
Committees have been appointed by the Board to administer the Plan, "Board" also
means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended, and any
applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means IKOS Systems, Inc., a Delaware corporation, or any
successor corporation thereto.
(e) "COMPENSATION" means, with respect to an Offering Period under the
Plan, base salary, overtime, commissions and bonuses paid during such Offering
Period before deduction for any contributions to any plan maintained by a
Participating Company and described in Section 401(k) or Section 125 of the
Code. Compensation shall not include other incentive payments, long-term
disability, workers' compensation or any other payments not included in base
salary, overtime, commissions and bonuses.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements
set forth in Section 5 for eligibility to participate in the Plan.
<PAGE>
(g) "EMPLOYEE" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating Company and for purposes of Section 423 of the Code; provided,
however, that neither service as a Director nor payment of a director's fee
shall be sufficient to constitute employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, if there is then a
public market for the Stock, the closing price of a share of Stock (or the mean
of the closing bid and asked prices of a share of Stock if the Stock is so
reported instead) as reported on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") System, the NASDAQ National Market System or such
other national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date, or such other appropriate day as shall
be determined by the Board, in its sole discretion. If there is then no public
market for the Stock, the Fair Market Value on any relevant date shall be as
determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.
(j) "OFFERING" means an offering of Stock as provided in Section 6.
(k) "OFFERING DATE" means, for any Offering Period, the first day of
such Offering Period.
(l) "OFFERING PERIOD" means a period determined in accordance with
Section 6.1.
(m) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee participating in the
Plan.
(o) "PARTICIPATING COMPANY" means the Company or any Parent Corporation
or Subsidiary Corporation designated by the Board for inclusion in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time, the
Company and all other corporations collectively which are then Participating
Companies.
(q) "PURCHASE DATE" means, for any Offering Period (or Purchase Period
if so determined by the Board in accordance with Section 6.2), the last day of
such period.
(r) "PURCHASE PERIOD" means any period determined in accordance with
Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of Stock may be
purchased pursuant to the Plan, as determined in accordance with Section 9.
(t) "PURCHASE RIGHT" means an option pursuant to the Plan to purchase
such shares of Stock as provided in Section 8 which may or may not be exercised
during an Offering Period. Such option arises from the right of a Participant to
withdraw such Participant's accumulated payroll deductions not previously
applied to the purchase of Stock under the Plan (if any) and terminate
participation in the Plan or any Offering therein at any time during an Offering
Period.
<PAGE>
(u) "STOCK" means the common stock of the Company, as adjusted from
time to time in accordance with Section 4.2.
(v) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION. The Plan shall be administered by the Board, including
--------------
any duly appointed Committee of the Board. All questions of interpretation of
the Plan or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or such
Purchase Right. Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted Purchase
Rights pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided
in Section 4.2, the maximum aggregate number of shares of Stock that may be
issued under the Plan shall be two hundred fifty thousand (250,000) and shall
consist of authorized but unissued or reacquired shares of the Stock, or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, the shares of Stock allocable to the unexercised
portion of such Purchase Right shall again be available for issuance under the
Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company, or
in the event of any merger (including a merger effected for the purpose of
changing the Company's domicile), sale of assets or other reorganization in
which the Company is a party, appropriate adjustments shall be made in the
number and class of shares subject to the Plan, to the Per Offering Share Limit
set forth in Section 8.1 and to each Purchase Right and in the Purchase Price.
5. ELIGIBILITY.
-----------
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Any Employee of a Participating
Company shall be eligible to participate in the Plan except the following:
(a) Employees who have not completed at least six (6) months of
continuous employment with the Participating Company Group as of the
commencement of an Offering Period; provided, however, that this subsection (a)
shall not apply to Offering Periods commencing on and after August 1, 1996,
except with respect to those employees whose transactions in Stock are subject
to Section 16 of the Exchange Act ("INSIDERS");
(b) Employees who are customarily employed by the Participating Company
Group for twenty (20) hours or less per week; and
(c) Employees who own or hold options to purchase or who, as a result
of participation in the Plan, would own or hold options to purchase, stock of
the Company or of any Parent Corporation or Subsidiary Corporation possessing
five percent (5%) or more of the total combined voting power or value of all
classes of stock of such corporation within the meaning of Section 423(b)(3) of
the Code.
<PAGE>
5.2 LEASED EMPLOYEES EXCLUDED. Notwithstanding anything herein to the
contrary, any individual performing services for a Participating Company solely
through a leasing agency or employment agency shall not be deemed an "Employee"
of such Participating Company.
6. OFFERINGS.
---------
6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately six (6) months
duration (an "OFFERING PERIOD"). The first Offering Period shall commence on
February 8, 1996 and end on July 31, 1996. Subsequent Offerings shall commence
on the first days of February and August of each year and end on the last days
of the next July and January, respectively, occurring thereafter.
Notwithstanding the foregoing, the Board may establish a different term for one
or more Offerings or different commencing or ending dates for such Offerings;
provided, however, that no Offering may exceed a term of twenty-seven (27)
months. An Employee who becomes an Eligible Employee after an Offering Period
has commenced shall not be eligible to participate in such Offering but may
participate in any subsequent Offering provided such Employee is still an
Eligible Employee as of the commencement of any such subsequent Offering.
Eligible Employees may not participate in more than one Offering at a time. In
the event the first or last day of an Offering Period is not a business day, the
Company shall specify the business day that will be deemed the first or last
day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. If the Board shall so determine, in its
discretion, each Offering Period may consist of two (2) or more consecutive
purchase periods having such duration as the Board shall specify (individually,
a "PURCHASE PERIOD"), and the last day of each such Purchase Period shall be a
Purchase Date. In the event the first or last day of a Purchase Period is not a
business day, the Company shall specify the business day that will be deemed the
first or last day, as the case may be, of the Purchase Period.
6.3 GOVERNMENTAL APPROVAL; STOCKHOLDER APPROVAL. Notwithstanding any
other provision of the Plan to the contrary, any Purchase Right granted pursuant
to the Plan shall be subject to (a) obtaining all necessary governmental
approvals or qualifications of the sale or issuance of the Purchase Rights or
the shares of Stock and (b) obtaining stockholder approval of the Plan.
7. PARTICIPATION IN THE PLAN.
-------------------------
7.1 INITIAL PARTICIPATION. An Eligible Employee shall become a
Participant on the first Offering Date after satisfying the eligibility
requirements of Section 5 and delivering to the Company's payroll office or
other office designated by the Company not later than the close of business for
such office on the last business day before such Offering Date (the
"SUBSCRIPTION DATE") a subscription agreement indicating the Employee's election
to participate in the Plan and authorizing payroll deductions. An Eligible
Employee who does not deliver a subscription agreement to the Company's payroll
or other designated office on or before the Subscription Date shall not
participate in the Plan for that Offering Period or for any subsequent Offering
Period unless such Employee subsequently enrolls in the Plan by filing a
subscription agreement with the Company by the Subscription Date for such
subsequent Offering Period. The Company may, from time to time, change the
Subscription Date as deemed advisable by the Company in its sole discretion for
proper administration of the Plan.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
until such time as such Participant (a) ceases to be an Eligible Employee, (b)
withdraws from the Plan pursuant to Section 13.2 or (c) terminates employment as
provided in Section 14. If a Participant automatically may participate in a
subsequent Offering Period pursuant to this Section 7.2, then the Participant is
not required to file any additional subscription agreement for such subsequent
Offering Period in order to continue participation in the Plan. However, a
Participant may file a subscription agreement with respect to a subsequent
Offering Period if the Participant desires to change any of the Participant's
elections contained in the Participant's then effective subscription agreement.
<PAGE>
8. RIGHT TO PURCHASE SHARES.
------------------------
8.1 PURCHASE RIGHT. Except as set forth below, during an Offering Period
each Participant in such Offering Period shall have a Purchase Right consisting
of the right to purchase that number of whole shares of Stock arrived at by
dividing Twelve Thousand Five Hundred Dollars ($12,500) by the Fair Market Value
of a share of Stock on the Offering Date of such Offering Period; provided,
however, that such number shall not exceed five hundred (500) shares (the "PER
OFFERING SHARE LIMIT"). Shares of Stock may only be purchased through a
Participant's payroll deductions pursuant to Section 10.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
foregoing, if the Board shall establish an Offering Period of less than five and
one-half (52) months or more than six and one-half (62) months in duration, (a)
the dollar amount in Section 8.1 shall be determined by multiplying $2,083.33 by
the number of months in the Offering Period and rounding to the nearest whole
dollar, and (b) the Per Offering Share Limit shall be determined by multiplying
83.33 shares by the number of months in the Offering Period and rounding to the
nearest whole share. For purposes of the preceding sentence, fractional months
shall be rounded to the nearest whole month.
9. PURCHASE PRICE. The Purchase Price at which each share of Stock may be
--------------
acquired in a given Offering Period pursuant to the exercise of all or any
portion of a Purchase Right granted under the Plan shall be set by the Board;
provided, however, that the Purchase Price shall not be less than eighty-five
percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on
the Offering Date of such Offering Period, or (b) the Fair Market Value of a
share of Stock on the Purchase Date of such Offering Period. Unless otherwise
provided by the Board prior to the commencement of an Offering Period, the
Purchase Price for that Offering Period shall be eighty-five percent (85%) of
the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date, or (b) the Fair Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION. Shares of
--------------------------------------------------------
Stock which are acquired pursuant to the exercise of all or any portion of a
Purchase Right for an Offering Period may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the Offering
Period. Except as set forth below, the amount of Compensation to be deducted
from a Participant's Compensation on each payday during an Offering Period shall
be determined by the Participant's subscription agreement.
10.1 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
in the Plan.
10.2 LIMITATIONS ON PAYROLL DEDUCTIONS. The amount of payroll deductions
with respect to the Plan for any Participant on any payday shall be in one
percent (1%) increments not to exceed ten percent (10%) of the Participant's
Compensation on such payday. Notwithstanding the foregoing, the Board may
change the limits on payroll deductions effective as of a future Offering Date,
as determined by the Board. Amounts deducted from Compensation shall be reduced
by any amounts contributed by the Participant and applied to the purchase of
Company stock pursuant to any other employee stock purchase plan qualifying
under Section 423 of the Code.
10.3 ELECTION TO DECREASE OR STOP PAYROLL DEDUCTIONS. During an Offering
Period, a Participant may elect to decrease the amount deducted or stop
deductions from his or her Compensation by filing an amended subscription
agreement with the Company on or before the "Change Notice Date." The "CHANGE
NOTICE DATE" shall initially be the seventh (7th) day prior to the end of the
first pay period for which such election is to be effective; however, the
Company may change such Change Notice Date from time to time
10.4 PARTICIPANT ACCOUNTS. Individual Plan accounts shall be maintained
for each Participant. All payroll deductions from a Participant's Compensation
shall be credited to such account
<PAGE>
and shall be deposited with the general funds of the Company. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose.
10.5 NO INTEREST PAID. Interest shall not be paid on sums deducted from
a Participant's Compensation pursuant to the Plan.
10.6 COMPANY ESTABLISHED PROCEDURES. The Company may, from time to time,
establish or change (a) a minimum required payroll deduction amount for
participation in an Offering, (a) limitations on the frequency or number of
changes in the rate of payroll deduction during an Offering, (c) an exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars, (d)
payroll deduction in excess of or less than the amount designated by a
Participant in order to adjust for delays or mistakes in the Company's
processing of subscription agreements, (e) the date(s) and manner by which the
Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan, or (vi) such other limitations or procedures as
deemed advisable by the Company in the Company's sole discretion which are
consistent with the Plan and in accordance with the requirements of Section 423
of the Code.
11. PURCHASE OF SHARES.
------------------
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Offering or whose
participation in the Offering has not terminated on or before such Purchase Date
shall automatically acquire pursuant to the exercise of the Participant's
Purchase Right the number of whole shares of Stock arrived at by dividing the
total amount of the Participant's accumulated payroll deductions for the
Offering Period not previously applied toward the purchase of Stock by the
Purchase Price; provided, however, in no event shall the number of shares
purchased by the Participant during an Offering Period exceed the number of
shares subject to the Participant's Purchase Right. No shares of Stock shall be
purchased on a Purchase Date on behalf of a Participant whose participation in
the Offering or the Plan has terminated on or before such Purchase Date.
11.2 RETURN OF CASH BALANCE. Any cash balance remaining in the
Participant's Plan account shall be refunded to the Participant as soon as
practicable after the Purchase Date. However, in the event the cash to be
returned to a Participant pursuant to the preceding sentence is an amount less
than the amount necessary to purchase a whole share of Stock, the Company may
establish procedures whereby such cash is maintained in the Participant's Plan
account and applied toward the purchase of shares of Stock in the subsequent
Offering Period (or Purchase Period, as the case may be).
11.3 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.4 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which such Purchase Right relates shall expire immediately upon the end of such
Offering Period.
12. LIMITATIONS ON PURCHASE OF SHARES; RIGHTS AS A STOCKHOLDER.
----------------------------------------------------------
12.1 FAIR MARKET VALUE LIMITATION. Notwithstanding any other provision
of the Plan, no Participant shall be entitled to purchase shares of Stock under
the Plan (or any other employee stock purchase plan which is intended to meet
the requirements of Section 423 of the Code sponsored by the Company or a Parent
Corporation or Subsidiary Corporation) at a rate which exceeds $25,000 in Fair
Market Value, which Fair Market Value is determined for shares purchased during
a given Offering Period as of the Offering Date for such Offering Period (or
such other limit as may be imposed by the Code), for
<PAGE>
each calendar year in which the Participant participates in the Plan (or any
other employee stock purchase plan described in this sentence).
12.2 PRO RATA ALLOCATION. In the event the number of shares of Stock
which might be purchased by all Participants in the Plan exceeds the number of
shares of Stock available in the Plan, the Company shall make a pro rata
allocation of the remaining shares in as uniform a manner as shall be
practicable and as the Company shall determine to be equitable.
12.3 RIGHTS AS A STOCKHOLDER AND EMPLOYEE. A Participant shall have no
rights as a stockholder by virtue of the Participant's participation in the Plan
until the date of the issuance of a stock certificate for the shares of Stock
being purchased pursuant to the exercise of the Participant's Purchase Right.
No adjustment shall be made for cash dividends or distributions or other rights
for which the record date is prior to the date such stock certificate is issued.
Nothing herein shall confer upon a Participant any right to continue in the
employ of the Participating Company Group or interfere in any way with any right
of the Participating Company Group to terminate the Participant's employment at
any time.
13. WITHDRAWAL.
----------
13.1 WITHDRAWAL FROM AN OFFERING. A Participant may withdraw from an
Offering by signing and delivering to the Company's payroll or other designated
office a written notice of withdrawal on a form provided by the Company for such
purpose. Such withdrawal may be elected at any time prior to the end of an
Offering Period; provided, however, if a Participant withdraws after a Purchase
Date, the withdrawal shall not affect shares of Stock acquired by the
Participant on such Purchase Date. Unless otherwise indicated, withdrawal from
an Offering shall not result in a withdrawal from the Plan or any succeeding
Offering therein. A Participant is prohibited from again participating in an
Offering at any time following withdrawal from such Offering. The Company may
impose, from time to time, a requirement that the notice of withdrawal be on
file with the Company's payroll office or other designated office for a
reasonable period prior to the effectiveness of the Participant's withdrawal
from an Offering.
13.2 WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the Plan
by signing and delivering to the Company's payroll office or other designated
office a written notice of withdrawal on a form provided by the Company for such
purpose. Withdrawals made after a Purchase Date shall not affect shares of Stock
acquired by the Participant on such Purchase Date. In the event a Participant
voluntarily elects to withdraw from the Plan, the Participant may not resume
participation in the Plan during the same Offering Period, but may participate
in any subsequent Offering under the Plan by again satisfying the requirements
of Sections 5 and 7.1. The Company may impose, from time to time, a requirement
that the notice of withdrawal be on file with the Company's payroll office or
other designated office for a reasonable period prior to the effectiveness of
the Participant's withdrawal from the Plan.
13.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's withdrawal from
an Offering or the Plan pursuant to Sections 13.1 or 13.2, respectively, the
Participant's accumulated payroll deductions which have not been applied toward
the purchase of shares of Stock shall be returned as soon as practicable after
the withdrawal, without the payment of any interest, to the Participant, and the
Participant's interest in the Offering or the Plan, as applicable, shall
terminate. Such accumulated payroll deductions may not be applied to any other
Offering under the Plan.
14. TERMINATION OF EMPLOYMENT OR ELIGIBILITY. Termination of a Participant's
----------------------------------------
employment with the Company for any reason, including retirement, disability or
death or the failure of a Participant to remain an Eligible Employee, shall
terminate the Participant's participation in the Plan immediately. In such
event, the payroll deductions credited to the Participant's Plan account since
the last Purchase Date shall, as soon as practicable, be returned to the
Participant or, in the case of the Participant's death, to the Participant's
legal representative, and all of the Participant's rights under the Plan shall
terminate. Interest shall not be paid on sums returned to a Participant
pursuant to this Section 14. A Participant whose participation has been so
terminated may again become eligible to participate in the Plan by again
satisfying the requirements of Sections 5 and 7.1.
<PAGE>
15. TRANSFER OF CONTROL.
-------------------
15.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any
of the following occurs with respect to the Company: (i) the direct or indirect
sale or exchange in a single or series of related transactions by the
stockholders of the Company of more than fifty percent (50%) of the voting stock
of the Company; (ii) a merger or consolidation in which the Company a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets
of the Company; or (iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
15.2 EFFECT OF TRANSFER OF CONTROL ON PURCHASE RIGHTS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan or
substitute substantially equivalent Purchase Rights for stock of the Acquiring
Corporation. If the Acquiring Corporation elects not to assume or substitute
for the outstanding Purchase Rights, the Board may, in its sole discretion and
notwithstanding any other provision herein to the contrary, adjust the Purchase
Date of the then current Purchase Period to a date on or before the date of the
Transfer of Control, but shall not adjust the number of shares of Stock subject
to any Purchase Right. All Purchase Rights which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, if the corporation the stock of which is subject
to the outstanding Purchase Rights immediately prior to an Ownership Change
Event described in Section 15.1(a)(i) constituting a Transfer of Control is the
surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are
members of an affiliated group within the meaning of section 1504(a) of the Code
without regard to the provisions of section 1504(b) of the Code, the outstanding
Purchase Rights shall not terminate unless the Board otherwise provides in its
sole discretion.
16. NONTRANSFERABILITY OF PURCHASE RIGHTS. A Purchase Right may not be
-------------------------------------
transferred in any manner otherwise than by will or the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. The Company, in its absolute discretion, may impose
such restrictions on the transferability of the shares purchasable upon the
exercise of a Purchase Right as it deems appropriate and any such restriction
shall be set forth in the respective subscription agreement and may be referred
to on the certificates evidencing such shares.
17. REPORTS. Each Participant who has exercised all or part of his or her
-------
Purchase Right shall receive, as soon as practicable after the Purchase Date, a
report of such Participant's Plan account setting forth the total payroll
deductions accumulated, the number of shares of Stock purchased, the Purchase
Price for such shares, the date of purchase and the remaining cash balance to be
refunded or retained in the Participant's Plan account pursuant to Section 11.2,
if any. Each Participant shall be provided information concerning the Company
equivalent to that information generally made available to the Company's common
stockholders.
<PAGE>
18. RESTRICTION ON ISSUANCE OF SHARES. The issuance of shares under the Plan
---------------------------------
shall be subject to compliance with all applicable requirements of foreign,
federal or state law with respect to such securities. A Purchase Right may not
be exercised if the issuance of shares upon such exercise would constitute a
violation of any applicable foreign, federal or state securities laws or other
law or regulations. In addition, no Purchase Right may be exercised unless (a)
a registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
19. LEGENDS. The Company may at any time place legends or other identifying
-------
symbols referencing any applicable foreign, federal or state securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present to
the Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION
TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE STOCK
PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE
CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER
HEREOF MADE ON OR BEFORE ______________, 19__. THE REGISTERED HOLDER SHALL HOLD
ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN
THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE."
20. NOTIFICATION OF SALE OF SHARES. The Company may require the Participant
------------------------------
to give the Company prompt notice of any disposition of shares acquired by
exercise of a Purchase Right within two years from the date of granting such
Purchase Right or one year from the date of exercise of such Purchase Right.
The Company may require that until such time as a Participant disposes of shares
acquired upon exercise of a Purchase Right, the Participant shall hold all such
shares in the Participant's name (and not in the name of any nominee) until the
lapse of the time periods with respect to such Purchase Right referred to in the
preceding sentence. The Company may direct that the certificates evidencing
shares acquired by exercise of a Purchase Right refer to such requirement to
give prompt notice of disposition.
21. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time amend or
------------------------------------
terminate the Plan, except that (a) such termination shall not affect Purchase
Rights previously granted under the Plan, except as permitted under the Plan,
and (b) no amendment may adversely affect a Purchase Right previously granted
under the Plan (except to the extent permitted by the Plan or as may be
necessary to qualify the Plan as an employee stock purchase plan pursuant to
Section 423 of the Code or to obtain qualification or registration of the shares
of Stock under applicable foreign, federal or state securities laws). In
addition, an amendment to the Plan must be approved by the stockholders of the
Company within twelve (12) months of the adoption of such amendment if such
amendment would authorize the sale of more
<PAGE>
shares than are authorized for issuance under the Plan or would change the
definition of the corporations that may be designated by the Board as
Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing is the IKOS Systems, Inc. 1996 Employee Stock Purchase Plan as
duly adopted by the Board on October 26, 1995 and amended by the Board through
November 12, 1997.
/s/ Joseph W. Rockom
-------------------------
Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> OCT-03-1998 OCT-03-1998
<PERIOD-START> JAN-04-1998 SEP-28-1998
<PERIOD-END> APR-04-1998 APR-04-1998
<CASH> 11,170 11,170
<SECURITIES> 9,874 9,874
<RECEIVABLES> 12,212 12,212
<ALLOWANCES> (551) (551)
<INVENTORY> 5,965 5,965
<CURRENT-ASSETS> 43,397 43,397
<PP&E> 13,245 11,349
<DEPRECIATION> (8,147) (7,080)
<TOTAL-ASSETS> 54,859 56,550
<CURRENT-LIABILITIES> 13,372 14,348
<BONDS> 0 0
0 0
0 0
<COMMON> 84 85
<OTHER-SE> 41,218 41,905
<TOTAL-LIABILITY-AND-EQUITY> 54,859 56,550
<SALES> 9,162 18,244
<TOTAL-REVENUES> 12,319 24,384
<CGS> 2,723 5,178
<TOTAL-COSTS> 3,173 6,186
<OTHER-EXPENSES> 8,793 17,413
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 649 1,401
<INCOME-TAX> 245 530
<INCOME-CONTINUING> 404 871
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 404 871
<EPS-PRIMARY> 0.05 0.10
<EPS-DILUTED> 0.05 0.10
</TABLE>
