<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 2, 1999 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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 77-0100318
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19050 PRUNERIDGE AVENUE, CUPERTINO, CA 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(408) 255-4567
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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 such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The approximate aggregate market value of the registrant's Common Stock
held by non-affiliates as of November 8, 1999, was approximately $63,060,195.
As of November 8, 1999, approximately 8,408,026 shares of the registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders
are incorporated by reference in Part III hereof.
This report (excluding exhibits) contains 49 pages. The Index to Exhibits
begins on Page 25 of this report.
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<PAGE>
PART I
Item 1. Business
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934. In
this report, the words, "anticipates," "believes," "expects," "future,"
"intends" and similar expressions identify forward-looking statements.
Stockholders are cautioned that all forward-looking statements pertaining to
the Company involve risks and uncertainties, including, without limitation,
those contained under the caption, "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.
General
IKOS Systems, Inc. (IKOS or the Company) develops, manufactures, markets,
and supports hardware and software systems for the verification of integrated
circuits (ICs). IKOS' mission is to help customers realize their high
complexity electronic systems through innovative design verification solutions.
IKOS differentiates its verification solutions with three technologies:
hardware acceleration, emulation hardware, and software for compilation and
integration of both emulation and acceleration hardware into the design flow.
IKOS also provides services to customers to assist in the integration and
deployment of IKOS solutions.
The Company sells its products and services to a broad range of customers,
including telecommunications, multimedia, semiconductor, computer, consumer
electronics, and aerospace application segments. The Company's customers
include Lucent Technologies, ATI, Micron , STMicroelectronics, Infineon, nVIDIA
and SIS. Headquartered in Cupertino, California, IKOS has 4 development centers
worldwide: Cupertino California, Waltham Massachusetts, Noida India and
Minneapolis Minnesota; in addition IKOS supports direct sales operations in
North America, the United Kingdom, France, Germany, and Japan. The Company has
a distributor network covering the remainder of Europe and parts of Asia. IKOS
is publicly traded on the Nasdaq National Market under the symbol IKOS. IKOS
was incorporated in Delaware in May 1990.
Background
The Electronic Design Automation (EDA) industry provides design automation
tools and technology to the semiconductor industry. Computer-aided Engineering
(CAE) and Integrated Circuit Computer-aided Design (ICCAD) are the largest
segments in the EDA market and the Company is focused on the verification
sub-segment of the CAE market. The demand for design automation tools in this
segment continues to grow at a faster rate than the EDA industry in total. The
fundamental drivers in this arena are the continuing trend toward increased
design complexity, the inability of design engineering productivity to keep
pace, and the resulting productivity gap. Using Moore's law, the Company
expects a 58% compounded annual growth rate in design complexity while, under
the same assumptions, the Company expects design engineering productivity to
grow at only 21% annually. This creates an ever-widening productivity gap that
EDA tool vendors seek to address.
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Design verification is the assessment of the functionality (both logic and
system) and timing of a design prior to fabrication. Design engineers are
looking for ways to cut verification time and therefore are moving toward a
method of verifying a design at a "functional" level (referred to as the
Register Transfer Level or RTL). This means performing verification in the
earlier phases of the design cycle to boost productivity, manage design
complexity, and reduce cycle times. The figure below illustrates IKOS' value to
customers as they attack the critical simulation bottlenecks. Note that on any
given verification iteration, Software Simulation takes the longest. IKOS' Nsim
product can accelerate that portion of the design that is represented in gates,
while IKOS' ARES product can accelerate that portion of the circuit that is
represented at the RTL level.
[LOGO APPEARS HERE]
RTL Verification Bottleneck graphic which illustrates IKOS' value to customers
as they attack the critical simulation bottlenecks.
The verification cycle is a critical part of the design process with
significant impact upon the design engineer's productivity. Customers estimate
that up to 70% of their total design cycle time is spent in the verification
phases. The Company is focused on selling products and solutions for
accelerating the RTL simulation and gate-level or sign-off timing simulation.
As design sizes increase, the amount of testing required to thoroughly verify
functionality also grows. Increasing design size and time to market pressures
create more demand for throughput for thorough verification of these high-
complexity designs, exceeding the performance capability of software simulators
running on general purpose workstations. IKOS' simulation solutions shrink the
verification cycle by providing acceleration for gate-level acceleration and
RTL acceleration.
In addition to the simulation bottleneck described above, high complexity
system-on-chip (SoC) designs are facing a new verification challenge of system
integration verification. The traditional approach to system integration was to
develop the hardware and software separately and integrate the two at the end
of the project when you have real hardware to run the newly developed software.
An example would be the development of a 3D graphics chip used in PC's. These
chips require software drivers to interface them to the PC's installed monitor.
There are substantial advantages if the software driver can be run using an
emulation of the chip while it is still being designed. It allows both the
software and hardware developer to find bugs early in the design process and
also allows the hardware developer to make performance trade-offs before the
chip is actually manufactured.
2
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With the advent of SoC designs, design teams are looking for ways to provide
system integration verification early in the design cycle to prove system level
functionality early. The figure below shows how early system integration
shrinks the design cycle.
[LOGO APPEARS HERE]
IKOS' Systems Integration Value Proposition graphic shows how early system
integration shrinks the design cycle.
IKOS emulation products are ideal for tackling the challenge of early system
integration. One of the key challenges with integration of hardware and
software is performance. Simulation has proven to be too slow to allow for
realistic system operation. IKOS emulation platforms offer 1 million cycles per
second verification performance and deliver the level of performance necessary
to verify system operation and run the system software for an integrated view
of the system.
Company Solutions
IKOS offers two different hardware technologies for verification, namely, 1)
emulation and 2) hardware accelerated simulation. The emulation technology is
utilized primarily for system-level verification where simulation and hardware
accelerated simulation fall short of meeting customers' verification
requirements. The figure below positions three verification technologies;
software simulation, simulation acceleration, and emulation. These technologies
are positioned from two perspectives: first where you are in the design cycle
(i.e. early conceptual design and verification to implementation verification)
and the second is the average performance of the solution measured in cycles
per second.
3
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[LOGO APPEARS HERE]
IKOS' Products graphic shows how IKOS' products are positioned within three
verification technologies; software simulation, simulation acceleration, and
emulation.
The Company's emulation solutions are differentiated from the competition
through the Company's patented VirtuaLogic compiler technology. VirtuaLogic
allows the Company to deliver the lowest cost, high capacity solution available
in emulation today and provides two to three orders of magnitude more
performance than hardware accelerated simulation. The Company's VLE and Avatar
emulation platforms leverage the rapidly growing system-level verification
requirements created by the growth in silicon complexity.
The hardware accelerated simulation technology is used for chip-level and
sign-off level verification and provides one to two orders of magnitude more
performance than software simulation. These two hardware technologies are
augmented with software technologies: compilation software and integration
software and interfaces to support customer design flows with high performance
verification. The Company's Nsim and ARES simulation platforms leverage the
growing bottleneck in RTL simulation created by the growth in silicon
complexity.
The Company further augments its simulation and emulation products with
consulting services for on-site support and design verification expertise to
help customers achieve project goals. Verification services allow the customer
to outsource the work needed to integrate new verification products into their
design flow or deliver new verification capabilities to the design team. These
services allow the customer to invest and focus on what differentiates them
while benefiting from the custom integration of high performance verification
to their design flow.
Maintenance and Support
The Company provides hardware and software maintenance and support on a
contractual basis after the initial product warranty has expired. Hardware
maintenance is provided on an on-site or on a return and repair basis. The
Company also provides application support via a toll-free telephone line.
Customers with software maintenance coverage also receive software upgrades, if
any, from the Company. Foreign distributors generally provide customer
training, service and support for the products they sell. Maintenance revenues,
as a percent of total revenues, represented 27% in fiscal 1999, 32% in fiscal
1998 and 17% in fiscal 1997.
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Competition
In emulation mainly used for system-level verification, the Company's main
competitors are Cadence Design Systems, Inc. ("Cadence/Quickturn") by virtue of
their acquisition of Quickturn Design Systems, Inc. ("Quickturn") in 1999 and
Mentor Graphics Corporation ("Mentor"). Cadence/Quickturn continues to be the
market leader. Mentor Graphics offers emulation solutions in Europe and Asia
but is currently enjoined from selling in the United States as a result of
litigation initiated by Cadence/Quickturn. The Cadence/Quickturn and Mentor
Graphics legal proceedings have continued and still await rulings from several
courts. In addition to its legal matters, Cadence/Quickturn continues to
transition customers to their new hardware. Cadence/Quickturn announced their
next generation emulator "Mercury" and the end of life of their current System
Realizer product in 1998. The legal proceedings and acquisition by Cadence
slowed this transition, so consequently customers are still making transition
decisions on moving from System Realizer to the new Mercury system.
Competitors in the chip-level and sign-off level verification market include
software simulation providers such as Synopsys, Inc. ("Synopsys"), Mentor
Graphics, and Cadence Design Systems, Inc. ("Cadence"). Hardware accelerated
simulation providers include a new company entering the market this year, Axis
Systems. For sign-off level verification the Company's strongest competition
comes from static tools from providers such as: Chrysalis, Synopsys, and
Cadence.
The Company expects competition in the verification market to continue to
expand and change. Moreover, the Company competes, and expects that it will
continue to compete, with established EDA companies. A number of these
companies have longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and larger
installed customer bases than the Company. In addition, many of these
competitors and potential competitors have established relationships with
current and potential customers of the Company and offer a broader and more
comprehensive product line. Increased competition could result in price
reductions, reduced margins and loss of market share, all of which could
materially adversely affect the Company. In addition, current competitors or
other entities may develop other products that have significant advantages over
the Company's products. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its operating results.
The Company competes on the basis of certain factors, including product
performance, price, support of industry standards, technical support and
customer service, timely introduction of new products, ease of use and
reputation. The Company believes that it currently competes favorably overall
with respect to these factors.
Customers, Marketing and Sales
IKOS sells its products to a broad range of companies including those in the
communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries. The Company markets its products and services
primarily through its direct sales and service organization. The Company
employs a technically-oriented sales force and application engineering team to
serve the needs of existing and prospective customers. The Company's consulting
services provide customers with a comprehensive solution that is tailored
specifically to the needs of the design team. These services include education,
application services, interface software support, custom library development
and other on-site support through customized consulting partnerships to assist
the customer in accomplishing key verification milestones.
IKOS' direct sales strategy concentrates on those companies that it believes
are key users and designers of complex ICs and IC-based systems for high-
performance applications. For the fiscal years ended October 2, 1999, October
3, 1998 and September 27, 1997, one customer Lucent Technologies, Inc.,
accounted for approximately 14%, 13%, and 11% of net revenues, respectively.
Direct Sales. IKOS currently maintains direct sales and support offices in
the following states: Arizona, California, Illinois, Massachusetts, New Jersey
and Texas. IKOS makes direct sales internationally in Canada,
5
<PAGE>
in Japan through its wholly-owned subsidiary, IKOS K.K. and in central Europe
through its wholly-owned subsidiary, ICOS Systems GmbH, and through its sales
offices in France and England. Direct sales, including maintenance fees,
accounted for approximately 94% of the Company's net revenues in fiscal year
1999. Direct sales, including maintenance fees, accounted for over 95% of the
Company's net revenues in fiscal year 1998. Direct sales for fiscal 1997 as a
percentage of net revenues were 90%.
Distributors. IKOS believes that international markets are an important
source of the Company's revenues and while the bulk of its sales is through
direct channels, the Company has developed distributor relationships in ten
foreign countries in Europe and Asia. In fiscal 1997, the Company terminated
its distributor relationship in Japan and began selling directly in that
market. Subsequent to fiscal 1999, the Company entered into a new distributor
agreement for sales in Japan. Revenues to distributors were less than 10% and
5% of the Company's net revenues for the fiscal year 1999 and 1998,
respectively. Distributor revenues for fiscal 1997 as a percentage of net
revenues were approximately 10%.
International Sales. International sales, including export sales and foreign
operation net revenues, accounted for approximately 37%, 36% and 34% of the
Company's net revenues in fiscal 1999, 1998, and 1997 respectively.
International revenues increased during fiscal 1999 due to increased demand for
the Company's product, primarily in Europe and the South Asia territories. In
fiscal 1998, international revenues decreased as a result of decreases in
Voyager sales and limited availability of emulation product for shipment during
fiscal 1998. During fiscal 1997, the Company terminated its Japan distributor
relationship and completed its transition to a direct sales channel in Japan.
This transition contributed to less than expected revenues in Japan during the
fiscal years 1999 and 1998. Subsequent to fiscal 1999, the Company entered into
a new distributor agreement for sales to Japan. Although the Company has
attempted to reduce the risk of fluctuations in exchange rates associated with
international revenues by selling its systems denominated in U.S. dollars only,
the Company pays the expenses of its international operations in local
currencies and has not engaged in hedging transactions with respect to such
obligations. With the exception of sales to customers through the Japan
subsidiary, sales in all foreign countries are denominated in U.S. dollars.
Sales through the Japan subsidiary are denominated in Japanese Yen. For those
sales made in Japanese Yen, the Company periodically enters into foreign
exchange contracts to minimize foreign exchange risk relating to the Japanese
subsidiary's sales.
Conducting business in international markets requires compliance with
applicable laws and regulations, such as safety and telecommunication laws and
regulations of foreign jurisdictions and import duties and quotas. To date, the
Company has not experienced any difficulty in obtaining export licenses from
the U.S. Department of Commerce for foreign sales; however, there can be no
assurance that the Company will not experience difficulties in the future.
Manufacturing and Suppliers
The Company performs final assembly and test of all its products in its
Cupertino, California facility. The Company utilizes third parties for all
major subassembly manufacturing, including printed circuit boards and custom
ICs. The Company has a testing and qualification program to ensure that all
subassemblies meet the Company's specifications before going into final
assembly and test.
The capacity and speed of IKOS' hardware results from its basic design and
architecture, and includes certain proprietary components and components that
are required to perform near technological limits. Certain key components used
in the Company's products are presently available from sole or limited sources.
The Company believes that it could obtain alternative sources in a short period
of time, although the inability to develop alternative sources for these sole
or limited source components or to obtain sufficient quantities of these
components could result in delays or reductions in product shipments which
could adversely affect the Company's operating results. The Company's
simulation and emulation systems use proprietary ASICs, FPGAs and certain
subassemblies that are currently available from single sources. 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
6
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arrangements with any of these source suppliers that require the suppliers to
provide components in guaranteed quantities or at set prices. The Company
endeavors to maintain an ample supply of such components at all times through
order generation based on tracking of sales projections, production and
inventories, and by ordering critical components for delivery over an extended
period.
Product Development
The Company's ongoing product development activities include the enhancement
of current products, such as the ability to simulate, emulate and verify the
design of higher gate count ICs and to offer a greater degree of integration
with EDA tools. Furthermore these product development activities include the
development of new product options and features, such as new library tools and
the research and development of new technologies for use in future products.
The Company's research and product development organization included 118
engineers at October 2, 1999. During fiscal 1999, 1998, and 1997, the Company
spent approximately $13.4 million, $14.4 million, and $10.7 million,
respectively, on research and development. During fiscal 1998, the Company also
spent approximately $9.0 million acquiring technology from Interra, Inc. In
addition to acquiring this technology, the Company also obtained the services
of approximately 52 software engineers in establishing a research and
development subsidiary in India. During 1997, the Company spent approximately
$7.3 million, related to acquiring technology purchased from Zycad Corporation
("Zycad"). The Company's research and development costs, including costs of
software development before technological feasibility, are expensed as
incurred.
Proprietary Rights
Due to the rapid pace of technological advancement, the Company believes it
is less dependent on the protection of proprietary product information than on
its ability to develop and market new products. The Company protects its
proprietary product information through the use of employee nondisclosure
agreements and by limiting access to confidential information. The Company
presently has 11 United States patents, that cover various aspects and features
of its products, including its overall system architecture and certain features
in the systems hardware for both simulation and emulation products. These
licenses expire between November 22, 2005 and December 29, 2015. The Company
also has licensed rights under certain patent applications relating to
VirtualWires from MIT. This license is through December 2004, and thereafter
becomes nonexclusive. MIT may terminate this license if the Company fails to
meet certain minimum net sales milestones or upon certain other material
breaches of the license agreement that remain uncured after 90 days' notice of
such breach. Although the Company may file additional patent applications in
the future, it does not expect to rely extensively on patents to protect its
products.
The Company also relies on certain software which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's systems to perform key functions.
From time to time the Company has received, and may receive in the future,
notice of claims of infringement of other parties' proprietary rights. Although
the Company does not believe that its products infringe the proprietary rights
of any third parties, there can be no assurance that infringement or invalidity
claims (or claims for indemnification resulting from infringement claims) will
not be asserted against the Company or that any such assertions will not
materially adversely affect the Company's business, financial condition or
results of operations. Irrespective of the validity or the successful assertion
of such claims, the Company could incur significant costs and diversion of
management efforts with respect to the defense thereof which could have a
material adverse effect on the Company' business, financial condition or
results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available under reasonable terms or at
all.
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The Company's tradename, "IKOS," its facing parrots logo and its product
series named "Voyager" are registered trademarks of the Company.
Employees
As of October 2, 1999, the Company employed a total of 290 persons,
consisting of 127 in marketing, sales and support, 15 in manufacturing, 118 in
research, development and engineering, and 30 in finance, administration and
other capacities. The Company has never had a work stoppage. None of its
employees is represented by a labor organization, and the Company considers its
relations with its employees to be good.
Item 2. Properties
The Company's principal executive offices, as well as its principal
manufacturing, marketing, research and development, and engineering facility,
are located on approximately 57,000 square feet of leased office building space
in Cupertino, California. The lease on this facility expires September 2000,
with options to extend the lease for up to nine years. The Company is currently
completing negotiations for building space for up to 106,000 square feet in San
Jose, California to replace the expiring lease. In addition, the Company leases
research and development and sales office space domestically in Arizona,
California, Illinois, Massachusetts, Minnesota, New Jersey and Texas and
internationally in England, France, Germany and Japan. The Company believes
that its existing facilities are adequate for its current needs and that
additional space will be available as needed.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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Executive Officers of the Registrant
Set forth below is certain information with respect to age and background
for each of the officers of the Company.
<TABLE>
<CAPTION>
Name Age Position With the Company
---- --- -------------------------
<C> <C> <S>
Gerald S. Casilli....... 60 Chairman of the Board
Ramon A. Nunez.......... 45 Chief Executive Officer, President and Director
Chief Financial Officer, Vice President of
Joseph W. Rockom........ 60 Finance and Administration, and Secretary
Vice President of Advanced Research and Chief
Daniel R. Hafeman....... 50 Technical Officer
Stephen M. McLaughlin... 52 Vice President of Manufacturing
Vice President of Business Development and
Lawrence A. Melling..... 42 Strategic Marketing
Robert Hum.............. 47 Senior Vice President of Product Operations
Nader Fathi............. 40 Vice President of International Sales
Tom Gardner............. 51 Vice President of North American Sales
</TABLE>
Mr. Casilli has served as Chairman of the Board of Directors of the Company
since July 1989 and served as Chief Executive Officer from April 1989 to August
1995. He has served as a Director since 1986. Mr. Casilli is also currently a
Director for Evans and Sutherland Computer Corporation. From January 1986 to
December 1989, he was a general partner of Trinity Ventures, Ltd., a venture
capital firm that was a former investor in the Company. Mr. Casilli was a
general partner of Genesis Capital, a venture capital firm, from February 1982
to 1990. Mr. Casilli founded Millennium Systems, a manufacturer of
microprocessor development systems, in 1973 and served as its President and
Chief Executive Officer until 1982.
Mr. Nunez was appointed Chief Executive Officer in August 1995. Mr. Nunez
had been President, Chief Operating Officer and Director of the Company since
October 1994. He had served as Vice President of Worldwide Sales since July
1993. Mr. Nunez joined the Company in April 1990 as Vice President of
North American Sales after five years in sales management with Zycad
Corporation. Earlier he was branch sales manager for Cadnetix (now part of
Intergraph) in Southern California.
Mr. Rockom has served as Chief Financial Officer and Vice President of
Finance and Administration since September 1986. Mr. Rockom has also served as
the Company's Secretary since April 1995. Before joining the Company, Mr.
Rockom spent seventeen years at American Microsystems, Inc. (AMI), a
semiconductor manufacturer, where he held a variety of administrative,
operating and management positions, including Vice President of Finance.
Mr. Hafeman, a founder of the Company, has served as Vice President of
Advance Research and Chief Technical Officer since March 1996. Mr. Hafeman
served as Vice President of Engineering from August 1989 to March 1996. From
December 1984 to August 1989, he served in various positions of engineering
management with the Company. Mr. Hafeman was an engineering manager at
Scientific Micro Systems, Inc. for eight years prior to his employment with the
Company.
Mr. McLaughlin has served as Vice President of Manufacturing since November
1986. From July 1977 to November 1986, he served as Director of Manufacturing
of Scientific Micro Systems, Inc.
Mr. Melling has served as Vice President of Business Development and
Strategic Marketing since December 1997. Prior to this, he was Vice President
of Marketing from July 1993 to December 1997. From August 1990 to July 1993,
Mr. Melling was Vice President of Technical Support. From 1983 until joining
IKOS in 1985, Mr. Melling had been a system design engineer at Corvus Systems,
a manufacturer of computer networking equipment. Prior to his relationship with
Corvus Systems, he was a production and circuit engineer with Hewlett-Packard
for four years.
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Mr. Hum was promoted to Senior Vice President of Product Operations in
January of 1998. He came to IKOS as Vice President of Engineering in May of
1997 from Cadence Design Systems where he served in several senior business and
technical management positions. Prior to joining Cadence, Mr. Hum held a
variety of technical and business management roles during an 18-year tenure at
Bell-Northern Research (NORTEL).
Mr. Fathi was promoted to Vice President of International Sales in June
1998. Prior to joining IKOS, Mr. Fathi served in several sales, marketing,
program management and customer support management positions at Cadence, Daisy
(now part of Intergraph), Silicon General and Xerox Microelectronics Center.
Mr. Gardner was promoted to Vice President of North American Sales in June
1998. Earlier, he held senior sales management positions in the eastern and
central US regions during the last two years. Most recently he held the
position of director of sales for the central region. Prior to joining IKOS,
Mr. Gardner held sales and sales management positions with Mentor Graphics,
Quickturn, Cadence and Zycad.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is currently traded on the Nasdaq National Market
under the symbol IKOS. The following table sets forth, for the fiscal period
indicated, the high and low closing sales prices for the Common Stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
Fiscal 1998
First Quarter............................................... $ 12.688 $ 5.688
Second Quarter.............................................. 8.750 6.500
Third Quarter............................................... 7.625 3.500
Fourth Quarter.............................................. 3.656 1.313
Fiscal 1999
First Quarter............................................... $ 3.625 $ 1.406
Second Quarter.............................................. 6.063 3.625
Third Quarter............................................... 9.875 5.000
Fourth Quarter.............................................. 11.000 6.375
</TABLE>
The approximate number of record holders of IKOS stock as of November 8,
1999 was 150. The approximate number of beneficial holders is estimated to be
3,800 as of that same date.
The Company has never declared or paid cash dividends on its stock. The
Company currently anticipates that it will retain all future earnings for use
in the operation and expansion of its business and does not anticipate paying
any cash dividends in the foreseeable future.
During fiscal 1998, the Company announced its intention to repurchase up to
1,000,000 shares of its outstanding common stock on the open market. Through
December 10, 1999, the Company had repurchased 516,500 shares at a weighted-
average per share price of $5.96 and approximately 202,000 shares of this total
have been reissued through the Company's stock option and stock purchase plans.
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Item 6. Selected Financial Data (in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------
Oct. 2, Oct. 3, Sept. 27, Sept. 28, Sept. 30,
1999 1998 1997 1996 1995
------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues....................... $56,333 $ 40,893 $56,096 $45,341 $28,600
Cost of revenues................... 13,778 14,734 12,452 9,852 7,139
------- -------- ------- ------- -------
Gross profit..................... 42,555 26,159 43,644 35,489 21,461
Operating expenses................. 39,944 49,516 42,495 36,070 18,063
------- -------- ------- ------- -------
Income (loss) from operations...... 2,611 (23,357) 1,149 (581) 3,398
Other income....................... 495 1,031 1,269 1,140 169
------- -------- ------- ------- -------
Income (loss) before provision for
income taxes...................... 3,106 (22,326) 2,418 559 3,567
Provision (benefit) for income
taxes............................. 650 4,928 1,023 (1,892) 411
------- -------- ------- ------- -------
Net income (loss)................ $ 2,456 $(27,254) $ 1,395 $ 2,451 $ 3,156
======= ======== ======= ======= =======
Basic net income (loss) per share.. $ 0.30 $ (3.24) $ 0.17 $ 0.33 $ 0.56
======= ======== ======= ======= =======
Weighted-average shares used in
computing basic per share
amounts........................... 8,306 8,418 8,408 7,383 5,611
======= ======== ======= ======= =======
Diluted net income (loss) per
share............................. $ 0.27 $ (3.24) $ 0.16 $ 0.30 $ 0.51
======= ======== ======= ======= =======
Weighted-average shares used in
computing diluted per share
amounts........................... 9,140 8,418 8,927 8,114 6,151
======= ======== ======= ======= =======
Consolidated Balance Sheet Data:
Working capital.................... $ 8,278 $ 5,492 $31,608 $27,919 $ 7,509
Total assets....................... 31,790 33,344 56,550 53,471 17,152
Long-term, debt, less current
portion........................... -- -- -- 350 1,300
Total stockholders' equity......... 15,031 12,613 41,990 38,144 7,710
</TABLE>
See notes to consolidated financial statements, management discussion and
analysis of financial condition and results of operations.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement
The statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations that are forward looking involve numerous
risks and uncertainties and are based on current expectations. Actual results
may differ materially from those projected. Such risks and uncertainties may be
more fully described in other reports and information filed by the Company with
the Securities and Exchange Commission. Certain of these risks and
uncertainties are discussed under the caption "Factors That May Affect Future
Results of Operations."
Nature of Operations
The Company develops, manufactures, markets and supports hardware and
software systems for the verification of integrated circuit designs. IKOS'
mission is to help customers realize their high complexity electronic systems
through innovative design verification solutions. The Company's products are
designed to enable its customers to verify their designs more rapidly and
accurately than existing software-based simulation tools. In 1996, the Company
broadened its spectrum of verification solutions to extend from the design
concept stage to the prototype stage by introducing its first emulation system.
The Company commercially released its first emulation system in 1997 and has
completely redesigned its original emulation product to the current two million
gate emulation solution. During fiscal 1999, the Company released its third
generation emulation product, which provides a five million gate emulation
solution.
The Company sells its products to a broad range of customers in the
communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries. The Company markets its products and services
primarily through its direct sales and service organization as the Company has
direct sales operations throughout the United States and in the United Kingdom,
France, Germany and Japan. The Company also has a distribution network covering
the remainder of Europe and in parts of Asia. In fiscal 1998, the Company
opened a research and development operation in India.
Net Revenues
For the fiscal year ended October 2, 1999, net revenues increased 38% from
$40,893,000 in fiscal 1998 to $56,333,000 in fiscal 1999. The increase was
primarily the result of increased sales of the Company's emulation product.
Emulation revenues increased over 233% during the current fiscal year as the
Company commercially delivered its two million gate emulator late in the fourth
quarter of fiscal 1998 and its five million gate systems in the third quarter
of fiscal 1999. During fiscal 1998, emulation revenues were hampered by a
lengthy beta test program for it's the Company's two million gate emulation
product. Due to the extended length of the Company's beta program, emulation
revenues were lower than expected for fiscal 1998. Simulation revenues were
slightly higher in 1999 than fiscal 1998 showing a growth of approximately 10%.
The increase was higher than expected as the Company has introduced new
products although the Company believes the growth in the simulation product
line is limited. The Company expects simulation revenues to decrease slightly
during fiscal 2000, while emulation revenues are expected to increase as a
result of the Company's continued focus in this area. For the fiscal year ended
October 3, 1998, net revenues decreased 27% from $56,096,000 in fiscal 1997 to
$40,893,000 in fiscal 1998. The decrease was primarily the result of the
decline in the sales of the Company's Voyager simulation product line, which
decreased approximately 52% from the previous year. The decrease in simulation
revenues was 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. In addition, the Company encountered a lengthy beta test
program for its second-generation emulation product. Due to the extended length
of the Company's beta program, emulation revenues were lower than expected for
fiscal 1998 and flat with the previous year. The unexpected length of the beta
program limited the Company's shipments of revenue producing units during the
third quarter and fourth quarter of fiscal 1998. The Company completed its beta
program and began to ship commercial product during the fourth quarter of
fiscal 1998.
13
<PAGE>
In fiscal 1998, the Company has consolidated its consulting services group
with its technical support organization. As such, consulting services revenues
decreased from $4,132,000 in fiscal 1998 to $2,008,000 in fiscal 1999. The
Company no longer focuses on this source of revenue as a separate organization
and as such revenues in future periods will be consolidated with the related
product revenues. For fiscal 1998, consulting services revenue increased from
approximately $2,792,000 during the year ended September 27, 1997 to over
$4,132,000. The Company's aggressive pursuit of providing value added
consulting services to new and existing customers in fiscal 1998 was the main
reason for the increase. However, as previously noted that while the Company
has seen growth in this market, the Company has consolidated the services group
with its technical support organization to better leverage the Company's higher
margin product business. As a result, the growth realized in prior periods is
not likely to be indicative of revenue levels in future periods.
Maintenance revenues for fiscal 1999 increased 14% over the previous year to
$15,075,000 from $13,169,000. The growth is primarily attributable to the
current Voyager systems installed base and the increasing installed base of the
Company's emulation systems. However, the increase is offset by customers of
older Voyager systems are not renewing their maintenance on such systems at the
same rate as in the past. In addition, the growth rate is lower than prior
years due to the downturn in product revenues in fiscal 1998 that directly
impacted the level of products due for maintenance renewals in the fiscal 1999.
Also, lower growth rate is attributable to the overall transition of the
Company's installed based from primarily Voyager system holders to emulation
system holders. Fiscal 1998 maintenance revenues grew by 35% over fiscal 1997.
The increase was primarily the result of the level of Voyager systems installed
and the addition of the new emulation product.
International sales (export sales and sales by the Company's Japan and
European operations) were $21,076,000, $14,532,000 and $19,194,000 for fiscal
years 1999, 1998 and 1997, respectively. These sales represent 37%, 36% and 34%
of net revenues, respectively. For fiscal 1999, international revenues
increased by $6,545,000 and just slightly as a percentage of revenues. The
increase was primarily a result of the growth in sales in the Company's
European region from $9,620,000 in fiscal 1998 to $12,818,000 in fiscal 1999.
The Company has seen higher demand in this area over the past year resulting in
the increase. Revenues in Asia also increased significantly, increasing from
$4,912,000 in fiscal 1998 to $8,258,000 in fiscal 1999 or over 68% from the
prior year. The increase is due to a resurgence in the Asia marketplace after
several years of lower revenues due to problems in the Asian economy and the
reorganization of the Company's Japan operations. For fiscal 1998,
international revenues decreased in absolute dollars by 24% as a result of the
decreases in Voyager sales and the limited availability of emulation products
for shipment during fiscal 1998. The Company will continue to focus its efforts
on the international market and expects that international sales will increase
in 2000. There can be no assurances that international sales will increase to
the extent anticipated or that the growth that was obtained in fiscal 1999 can
be repeated.
Gross Profit
Gross profit was $42,555,000, $26,159,000 and $43,644,000 or 76%, 64% and
78% of total net revenues for fiscal years 1999, 1998 and 1997, respectively.
Overall gross margins and more specifically, product margins for fiscal 1999
increased primarily as a result of higher revenues overall and increased sales
of higher margin products. In addition, gross margins for fiscal 1998 were
reduced by the write-off of inventory related to obsolete verification
products. No similar write-off occurred in fiscal 1999. Also, overall margins
for fiscal 1999 were negatively impacted by higher maintenance costs associated
with new product introductions as well as the reorganization of the Company's
technical support team. For fiscal 1998, gross margins during the year were
lower as the Company recorded charges to operations of approximately $3,100,000
for the write-off of obsolete inventory related to the Company's verification
products. In addition to the impact from the inventory write-offs, the decrease
in margins are a result of the lower than expected revenues resulting in less
coverage of fixed manufacturing costs which include increased consulting
services personnel costs. These decreases were offset by higher margins on
maintenance revenues, as maintenance costs did not grow at the same rate as the
related revenues. The Company expects margins to increase from the current year
as the Company believes it
14
<PAGE>
will realize higher revenue levels, including sales of products with higher
margins and recognize greater manufacturing efficiencies.
Research and Development Expenses
Research and development expenses were $13,443,000, $14,381,000 and
$10,740,000 in fiscal 1999, 1998 and 1997, respectively. As a percentage of net
revenues, research and development expenses were 24%, 35% and 19% for fiscal
1999, 1998 and 1997, respectively. The decrease in research and development
expenses decreased in absolute dollars and as a percentage of revenues was
primarily due to non-recurring charges in fiscal 1998 associated with
prototypes for completed product projects, including its revamping of the
original emulation technology. There were fewer such costs in fiscal 1999 as
fewer prototype projects were completed during the year. Higher consulting fees
needed to complete the various projects also affected the fiscal 1998 spending.
In addition, the decrease in fiscal 1999 as a percentage of revenues is a
direct result of the lower revenues in fiscal 1998 when compared to spending in
fiscal 1998. The higher spending levels in fiscal 1998 due to project
completions and decreased revenue levels in fiscal 1998 are the primary reasons
for the increases over fiscal 1997 in both absolute dollars and as a percentage
of revenue. The Company expects research and development expenses to increase
in absolute dollars as the Company expects to continue its on-going research
and development efforts for completion of its current and future product
development projects.
Sales and Marketing Expenses
Sales and marketing expenses were $21,822,000, $18,609,000 and $17,516,000
in fiscal 1999, 1998 and 1997, or 39%, 46% and 31% of net revenues,
respectively. The increase in absolute dollars is due to salary and commission
increases as a result of higher sales levels. The increase is also a result of
higher spending for rep commissions, consultants, travel expenses and other
marketing expenditures for new product introductions. As a percentage of
revenues, sales and marketing expenses decreased from 1998 to 1999, primarily
due to the lower revenue base in 1998 when compared to the level of spending.
The increase in sales and marketing expenses in fiscal 1998 from fiscal 1997 is
primarily the result of higher salaries and commissions as well as increased
spending, depreciation and travel expenses. The Company expects sales and
marketing expenses to increase in absolute dollars in fiscal 2000 as the
Company continues to expand its field application engineering resources and to
support increased activities at its foreign locations.
General and Administrative Expenses
General and administrative expenses were $4,267,000, $4,247,000 and
$3,777,000 for fiscal 1999, 1998 and 1997, or 8%, 10% and 7% of net revenues,
respectively. General and administrative expenses remained flat in 1999 as
higher spending in payroll related costs were offset with lower consulting and
professional fees. General and administrative costs increased as a percentage
of net revenues in 1998 primarily as a result of the reduction in net revenues.
In addition, general and administrative expenses increased approximately
$500,000 as a result of increased consulting expenses associated with the
Company's recruiting efforts and new information system implementation. General
and administrative expenses are expected to increase in absolute dollars in
fiscal 2000.
Other Income
Net interest income in fiscal 1999 was $495,000, representing a 52% decrease
from the $1,031,000 earned in 1998. The decrease is due to the lower cash, cash
equivalent and short-term investment balances during fiscal 1999. Cash, cash
equivalents and short-term investments decreased from $15,682,000 in 1998 to
$10,534,000 in fiscal 1999. The decrease was primarily the result of an
increase in accounts receivable, purchases of equipment, repurchases of common
stock and reductions in accounts payable, accrued liabilities and deferred
revenues. Net interest income in fiscal 1998 was $1,031,000, representing a 19%
decrease from the $1,269,000 earned in 1997. The decrease was the result of the
reduction of cash, cash equivalents, and
15
<PAGE>
short-term investments from $24,815,000 in fiscal 1997 to $15,682,000. The
primary use of the interest income generating funds was the payment of
approximately $6,490,000 to Interra in connection with the Company's
acquisition of technology and the repurchase of approximately 387,000 shares of
common stock for approximately $2,673,000.
Provision for Income Taxes
During fiscal 1999, the Company recorded a tax provision of $650,000, which
primarily consisted of federal and state alternative minimum taxes and foreign
taxes. For fiscal 1998, the Company recorded a tax provision of $4,928,000. The
provision primarily consisted of the write down of the Company's net deferred
tax assets because these deferred tax assets are not considered to be
realizable on a more likely than not basis, as a result of the losses incurred
in fiscal 1998. During fiscal 1997, the Company recorded a tax provision of
$1,023,000, which primarily consisted of federal tax, state taxes, foreign
taxes, and the impact of goodwill amortization.
Other
With the exception of the Company's Japan operations, 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 periodically
enters into foreign exchange contracts to minimize foreign exchange risk
relating to the Japanese subsidiary's sales that are denominated in yen. A
forward exchange contract obligates the Company to exchange predetermined
amounts of a specified foreign currency at a specified exchange rate on a
specified date or to make an equivalent US dollar payment equal to the value of
such exchange. These contracts are accounted for as hedges of identifiable
receivables denominated in Japanese yen. Realized gains or losses are
recognized upon maturity of the contracts and offset the change in value of the
underlying asset or liability. Through October 2, 1999, 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 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.
16
<PAGE>
Sales Trends--Over the past several years the marketplace for the Company's
products has evolved substantially. The Company has seen a significant
reduction in sales of its simulation products as revenues have declined from
approximately $37,044,000 in fiscal 1997 to approximately $19,463,000 in fiscal
1999. While the decrease is due in part to the evolution of the market, the
primary cause of the decrease is the result of the Company's focus on its new
emerging product line of emulation solutions. The Company has seen its revenues
from its emulation products increase from approximately $6,000,000 in fiscal
1997 to over $20,000,000 in fiscal 1999. The Company anticipates that the
simulation product revenue will continue to decrease, however, on a slower pace
over the next year and its emulation revenues will increase resulting in
increased sales overall. There can be no assurance that the Company will be
able to maintain these expected trends. These trends will be dependent upon the
Company introducing new products and methodologies. Furthermore, increased
overall 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, the ability of the Company's products to shorten overall
customer design cycles and increased industry acceptance of the Company
verifications solutions. Because the market for hardware-assisted verification
products is evolving, it is difficult to predict with any assurance whether the
markets for such solutions 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 and maintain the market acceptance required to
maintain revenue growth and profitability in the future.
New Product Development--To obtain the expected revenue growth, the Company
needs to continue to invest in new product development. The Company has focused
most of its development resources on its emulation products. The Company's
initial emulation product was commercially released in the first quarter of
fiscal 1997. The Company encountered several hardware and software design
issues with its initial emulation product, and in addition, the EDA marketplace
for emulation products continued to evolve, impacting the original design.
During 1998, the Company addressed its hardware and software design issues by
completely redesigning the emulation product and released its second-generation
emulation product late in the fourth quarter of fiscal 1998. During fiscal
1999, the Company released its third-generation emulation product, which
provides a five million gate emulation solution. While the Company has seen
favorable results with its latest release, there can be no assurance that the
product will adequately meet the requirements of the marketplace. There
continues to be further development of the emulation product as well as other
verification products, and as the Company continues to develop such products
which are based on the new technology, there can be no assurance that the
enhanced 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 verification
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. Furthermore, the absence of performance problems or other
difficulties that may require design modifications and related expenses will
contribute to overall success otherwise such issues may hinder or damage market
acceptance of the products. While the Company's verification systems are
designed to provide cost and ease of use advantages intended to broaden the
market for hardware-assisted verification, 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 such verification solutions will broaden beyond
the current set of users.
In May 1998, the Company completed its acquisition of certain technology and
research and development expertise from Interra, Inc., and its affiliate,
Delsoft India Pvt. Limited. The Company has developed certain of the technology
into new products and the resources obtained in this transaction have
positively impacted the Company's product development deadlines. However, the
Company has significant development risk with respect to the continued
incorporation of the acquired technology into future products. Such effort will
result in increased spending on research and development as the Company
attempts to continue to meet its goals and deadlines. There can be no assurance
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 assurance that the resulting new products will
adequately meet the requirements of the marketplace.
17
<PAGE>
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 its
verification products. The Company currently competes with traditional software
verification methodologies, including product offerings sold by Cadence,
Synopsis and Mentor Graphics. The Company's main competition for the sale of
emulation systems is Quickturn/Cadence. The Company expects competition in the
market for verification tools to increase as other companies attempt to
introduce new products and product enhancements. Moreover, the Company
competes, and expects that it will continue to compete, with established EDA
companies. A number of these companies have longer operating histories,
significantly greater financial, technical and marketing resources, greater
name recognition and larger installed customer bases than the Company. In
addition, many of these competitors and potential competitors have established
relationships with current and potential customers of the Company and offer a
broader and more comprehensive product line. Increased competition could result
in price reductions, reduced margins and loss of market share, all of which
could materially adversely affect the Company. In addition, current competitors
or other entities may develop other products that have significant advantages
over the Company's products. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its operating results.
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. These 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
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
18
<PAGE>
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 verification hardware, 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 1999, 1998 and 1997, sales to the Company's top ten customers
accounted for approximately 60%, 45% and 52%, 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.
Year 2000 Considerations--The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. As such there is the risk that computer programs or hardware
that have date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. Such recognition, could result
in miscalculations, classifications errors or system failures. The Company has
taken steps to review, update or confirm such update of all of the systems (IT
and Non IT) which use date-sensitive computerized information used in its
operations, including its current products, vendor and customer systems. The
Company has completed its assessment and testing for Year 2000 compliance
within its current product lines and the Company believes all existing products
to be compliant. All future products are being designed and tested to be Year
2000 compliant. The costs associated with this assessment and testing have been
immaterial and have not materially impacted other non-Year 2000 IT projects.
The Company has completed its assessments of its significant third party
systems, including its IT systems and other vendor systems and believe such
systems are in compliance. The Company does not believe that the incremental
costs incurred to date or expected to be incurred in the future in addressing
this matter are material to the Company's operating results. However, if the
Company has failed to adequately address any of
19
<PAGE>
its systems or if its vendor or customer systems fail to adequately address
this risk, the Company's financial condition and results of operations could be
adversely affected. The Company has developed a contingency plan to provide
critical services. The Company will continue to devote the necessary resources
to the issue, however, disruptions to the economy generally resulting from the
Year 2000 issues could materially adversely impact the Company.
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 $10,534,000 at October 2, 1999 from
$15,682,000 at October 3, 1998. The decrease was a result of $3,064,000 cash
used in operating activities and $2,230,000 cash used in investing activities
(excluding short-term investment activities) offset by $146,000 of cash
provided by financing activities.
Operating Activities--The Company's operating activities used cash of
$3,064,000 in fiscal 1999 and provided cash of $3,482,000 during fiscal 1998
and $7,161,000 during fiscal 1997. The use of cash for operating activities
primarily consisted of an increase in accounts receivable and decreases in
accounts payable, other accrued liabilities and deferred revenues partially
offset by net income adjusted for depreciation and amortization and a decrease
in inventories with increases in accrued payroll and accrued commissions. For
fiscal 1998, the $3,482,000 cash provided by operations was primarily due to
net loss adjusted for special charges, depreciation and amortization, deferred
tax assets adjustments, a decrease in accounts receivable and inventory and
increases in accounts payable, income taxes payable and deferred revenues
offset by payments on accrued payroll. For fiscal 1997, the net cash provided
by operating activities primarily resulted from the net income adjusted for
special charges related to the Zycad technology purchase plus depreciation and
amortization offset by increases in accounts receivable, inventory and a
decrease in accounts payable.
Investing Activities--Net cash provided by investing activities for fiscal
1999 was $2,417,000 while cash used in investing activities for fiscal 1998 and
1997 was $2,413,000 and $10,172,000, respectively. During fiscal 1999, cash
provided by investing activities primarily related to the net maturities of
short-term investment that were converted to cash or cash equivalents offset by
purchases of capital equipment. The primary use of cash during fiscal 1998
consisted of approximately $3,235,000 in capital expenditures, $500,000 related
to the acquisition of Deerbrook Systems, Inc. and $6,490,000 related to the
acquisition of technology from Interra, Inc. This use of cash for investment
activities was offset by the net maturities of short-term investments totaling
$7,812,000. The primary uses of cash during fiscal 1997, was the $7,289,000
paid for the acquisition of technology from Zycad and capital expenditures of
approximately $2,192,000. For each period presented, capital expenditures were
primarily for evaluation equipment and engineering workstations. Also included
in the 1999 and 1998 capital expenditures were amounts related to leasehold
improvements with respect to the new development facility in India. The Company
expects continued capital expenditures during fiscal 2000 as expected headcount
additions and computer upgrade requirements will result in additional
acquisitions of computers and engineering workstations.
Financing Activities--Financing activities provided net cash of
approximately $146,000 during fiscal 1999. The net cash provided by financing
activities were primarily related to the net sale of common stock under the
Company's Stock Option and Stock Purchase Plans. During fiscal 1999, the
Company repurchased approximately 130,000 shares of commons stock for
approximately $407,000. Through October 2, 1999, the Company had repurchased
516,500 shares at a weighted-average per share price of $5.96. Of this total
170,000 shares have been reissued through the Company's stock option and stock
purchase plans. Net cash used in financing activities for the year ended
October 3, 1998, was $2,390,000 and was primarily related to the net purchases
of the Company's common stock during the year. During fiscal 1998, the Company
announced its intention to repurchase up to 1,000,000 shares of its outstanding
common stock on the open market. During fiscal 1998, the Company repurchased
approximately 386,500 shares at a weighted-average per share price of $6.92 or
approximately $2,674,000. In addition, the Company repaid its remaining
principal debt obligations
20
<PAGE>
totaling $350,000. During fiscal 1997, the Company's financing activities
provided cash of $1,907,000. Cash provided from financing activities during
fiscal 1997 were primarily related to proceeds of $2,451,000 from the exercise
of options to purchase common stock under the Company's stock option and
purchase plans. Such proceeds were offset by the payment of $750,000 on
outstanding debt obligations.
The Company's primary unused sources of funds at October 2, 1999 consisted
of $7,664,000 of cash and cash equivalents, in addition to $2,870,000 of short-
term investments. The Company is in the process of obtaining a general working
line of credit and equipment line of credit. While these arrangements are not
yet in place, the Company believes that its 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 and such financing arrangement will further assist the Company in
funding its operating, investing and financing activities. There can be no
assurances that such financing will be available on terms favorable or
acceptable to the Company.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
As of October 2, 1999, the Company's investment portfolio consists of money
market funds, and mortgaged-back government obligations generally due within
one year. The Company's primary objective with its investment portfolio is to
invest available cash while preserving principal and meeting liquidity needs.
In accordance with the Company's investment policy, the Company places
investments with high credit quality issuers and limits the amount of credit
exposure to any one issuer. These securities, which approximate $4,511,000 and
have an average interest rate of approximately 5%, are subject to interest rate
risks. However, based on the investment portfolio contents and the ability of
the Company to hold these investments until maturity, the Company believes that
if a significant change in interest rates were to occur, it would not have a
material effect on the Company's financial condition, although there can be no
assurance of this.
In addition to its cash equivalents and short-term investments, the Company
enters into derivative financial instruments such as forward exchange contracts
to hedge certain identifiable receivables denominated in Japanese yen. The
Company's accounting policies for these contracts are based on the Company's
designation of the contracts as hedging transactions. The criteria the Company
uses for designating a contract as a hedge includes the contract's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. As such, the impact of exchange rate
changes on these contracts is offset by the impact of the changes in the rate
on the underlying transactions. Therefore, any market risks associated with
these contracts and related underlying transactions are deemed minimal. As of
October 2, 1999, the Company did not have any foreign forward contracts
outstanding.
Item 8. Financial Statements and Supplementary Data
The Company's Financial Statements and Schedules, and the report of the
independent auditors appear on pages F-1 through F-18 and S-1 of this Form 10-
K.
The Company's Supplementary Data--Unaudited Selected Quarterly Financial
Data appears on F-18 of this Form 10-K.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
21
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained on pages 4, 5 and 6 of the Company's Definitive
Proxy Statement related to the Annual Meeting of Stockholders to be held
January 19, 2000, to be filed by the Company with the Securities and Exchange
Commission (the "Proxy Statement") with respect to the directors of the Company
is incorporated herein by reference. Information with respect to executive
officers of the Company is contained in Part I of this report.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
section captioned "EXECUTIVE COMPENSATION AND OTHER MATTERS" contained in the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
section captioned "GENERAL INFORMATION- Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Not applicable.
22
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following financial documents of the Registrant are filed as part of
this report:
(1) Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... F-1
Consolidated Balance Sheets, October 2, 1999 and October 3, 1998...... F-2
Consolidated Statements of Operations for the fiscal years ended
October 2, 1999, October 3, 1998 and September 27, 1997.............. F-3
Consolidated Statements of Stockholders' Equity for the fiscal years
ended October 2, 1999, October 3, 1998 and September 27, 1997........ F-4
Consolidated Statements of Cash Flows for the fiscal years ended
October 2, 1999, October 3, 1998 and September 27, 1997.............. F-5
Notes to Consolidated Financial Statements............................ F-6
</TABLE>
(2) Financial Statement Schedule:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II--Valuation and Qualifying Accounts......................... S-1
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or notes
thereto which are included herein.
(3) Exhibits:
See Index to Exhibits beginning on Page 25 of this report.
(b) The Company filed no reports on Form 8-K during the fourth quarter ended
October 2, 1999.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Ramon Nunez
By: _________________________________
Ramon Nunez,
Chief Executive Officer,
President and Director
December 17, 1999
POWER OF ATTORNEY
Each of the officers and directors of IKOS Systems, Inc. whose signature
appears below hereby constitutes and appoints Ramon A. Nunez and Joseph W.
Rockom and each of them, their true and lawful attorneys and agents, with full
power of substitution, each with power to act alone, to sign and execute on
behalf of the undersigned any amendment or amendments to this Report on Form
10-K and to perform any acts necessary in order to file such amendment or
amendments and each of the undersigned does hereby ratify and confirm all that
said attorneys and agents or their or his substitutes, shall do or cause to be
done by virtue hereof.
Pursuant to requirements of the Securities Exchange Act of 1934, this report
has been signed on behalf of the Registrant and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/s/ Ramon Nunez Chief Executive Officer, December 17,
____________________________________ President and Director 1999
(Ramon Nunez)
/s/ Gerald S. Casilli Chairman of the Board December 17,
____________________________________ 1999
(Gerald S. Casilli)
/s/ Joseph W. Rockom Vice President of Finance and December 17,
____________________________________ Administration and Chief 1999
(Joseph W. Rockom) Finance Officer (Principal
Accounting and Financial
Officer) and Secretary
/s/ James R. Oyler Director December 17,
____________________________________ 1999
(James R. Oyler)
/s/ Glenn E. Penisten Director December 17,
____________________________________ 1999
(Glenn E. Penisten)
/s/ Jackson Hu Director December 17,
____________________________________ 1999
(Jackson Hu)
/s/ William Stevens Director December 17,
____________________________________ 1999
(William Stevens)
</TABLE>
24
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
-------- ------------------------- ----
<C> <S> <C>
2.1 Agreement and Plan of Reorganization among the Company, VMW
Acquisition Corporation and VMW dated May 14, 1996
(Incorporated by reference to Exhibit 2.1 of the Company's
registration statement on Form S-3 effective June 26, 1996).
2.2 Technology Purchase Agreement dated May 12, 1998 by and
between the Company and Interra, Inc. (Incorporated by
reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K filed May 20, 1998).
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 of the Company's registration statement on Form
S-1 effective July 25, 1990).
3.2 Certificate of Amendment of Certificate of Incorporation
filed May 5, 1994 (Incorporated by reference to Exhibit 4.1
of the Company's registration statement on Form S-2
effective October 12, 1995).
3.3 Certificate of Amendment of Certificate of Incorporation
filed April 24, 1995 (Incorporated by reference to Exhibit
4.2 of the Company's registration statement on Form S-2
effective October 12, 1995).
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).
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.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
-------- ------------------------- ----
<C> <S> <C>
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).
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.
10.21 The Company's 1995 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.21 of the Company's
Quarterly Report on Form 10-Q for the quarter ended April 4,
1998).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
-------- ------------------------- ----
<C> <S> <C>
10.22 The Company's 1996 Employee Stock Purchase Plan, as amended
(Incorporated by reference to Exhibit 10.22 of the Company's
Quarterly Report on Form 10-Q for the quarter ended April 4,
1998).
10.23 The Company's amended and restated Rights Plan by and
between the Company and Bank of Boston NA dated January 22,
1999 (Incorporated by reference to Exhibit 1 of the
Company's report on Form 8-A /a filed on January 29, 1999.
10.24 Agreement dated April 11, 1997, by and between the Company
and Robert Hum (Incorporated by reference to Exhibit 10.24
of the Company's quarterly report on Form 10-Q for the
quarter ended July 3, 1999)
10.25 Agreement dated February 2, 1999, by and between the Company
and Thomas N. Gardner (Incorporated by reference to Exhibit
10.25 of the Company's quarterly report on Form 10-Q for the
quarter ended July 3, 1999).
10.26 Agreement dated February 3, 1999, by and between the Company
and Nader Fathi (Incorporated by reference to Exhibit 10.26
of the Company's quarterly report on Form 10-Q for the
quarter ended July 3, 1999).
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (Included on page 24 of this report).
27.1 Financial Data Schedule
</TABLE>
27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
IKOS Systems, Inc.
We have audited the accompanying consolidated balance sheets of IKOS
Systems, Inc., as of October 2, 1999 and October 3, 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended October 2, 1999. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of IKOS Systems, Inc., at October 2, 1999 and October 3, 1998, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended October 2, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
San Jose, California
October 21, 1999
F-1
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 7,664 $ 8,165
Short-term investments................................. 2,870 7,517
Accounts receivable (net of allowances for doubtful
accounts of $801 and $801, respectively).............. 10,549 6,033
Inventories............................................ 3,455 3,816
Prepaid expenses and other assets...................... 435 536
-------- --------
Total current assets............................... 24,973 26,067
Equipment and leasehold improvements
Office and evaluation equipment...................... 5,663 4,876
Machinery and equipment.............................. 10,513 9,201
Leasehold improvements............................... 718 587
-------- --------
16,894 14,664
Less allowances for depreciation and amortization.. (11,832) (9,342)
-------- --------
5,062 5,322
Intangible assets (net of accumulated amortization of
$716 and $303,
respectively)......................................... 1,146 1,559
Other assets........................................... 609 396
-------- --------
$ 31,790 $ 33,344
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................... $ 3,763 $ 4,789
Accrued payroll and related expenses................... 2,709 1,854
Accrued commissions.................................... 1,052 801
Income taxes payable................................... 1,019 1,185
Other accrued liabilities.............................. 2,815 4,350
Deferred revenues...................................... 5,337 7,596
-------- --------
Total current liabilities.......................... 16,695 20,575
Accrued rent............................................. 64 156
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,
8,797 and 8,797 shares issued and 8,401 and 8,361
outstanding, respectively............................. 88 87
Treasury stock, at cost, 396 shares in 1999 and 436 in
1998.................................................. (2,536) (3,144)
Additional paid-in capital............................. 58,312 58,775
Accumulated other comprehensive income................. (498) (314)
Accumulated deficit.................................... (40,335) (42,791)
-------- --------
Total stockholders' equity......................... 15,031 12,613
-------- --------
$ 31,790 $ 33,344
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
IKOS SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------
October 2, October 3, September 27,
1999 1998 1997
---------- ---------- -------------
<S> <C> <C> <C>
Net revenues
Product................................. $41,258 $ 27,724 $46,350
Maintenance............................. 15,075 13,169 9,746
------- -------- -------
Total net revenues.................... 56,333 40,893 56,096
Cost of revenues
Product................................. 9,578 12,952 10,745
Maintenance............................. 4,200 1,782 1,707
------- -------- -------
Total cost of revenues................ 13,778 14,734 12,452
------- -------- -------
Gross profit.......................... 42,555 26,159 43,644
Operating expenses:
Research and development................ 13,443 14,381 10,740
Sales and marketing..................... 21,822 18,609 17,516
General and administration.............. 4,267 4,247 3,777
Acquired in process research and
development and special charges........ -- 7,600 9,202
Amortization of intangibles............. 412 4,679 1,260
------- -------- -------
Total operating expenses.............. 39,944 49,516 42,495
------- -------- -------
Income (loss) from operations............. 2,611 (23,357) 1,149
Interest and other income................. 495 1,031 1,269
------- -------- -------
Income (loss) before provision for income
taxes.................................... 3,106 (22,326) 2,418
Provision for income taxes................ 650 4,928 1,023
------- -------- -------
Net income (loss)..................... $ 2,456 $(27,254) $ 1,395
======= ======== =======
Earnings (loss) per share:
Basic net income (loss)................... $ 0.30 $ (3.24) $ 0.17
======= ======== =======
Common and common equivalent shares used
in computing basic per share amounts..... 8,306 8,418 8,408
======= ======== =======
Diluted net income (loss)................. $ 0.27 $ (3.24) $ 0.16
======= ======== =======
Common and common equivalent shares used
in computing diluted per share amounts... 9,140 8,418 8,927
======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Treasury Stock Additional Other Total
Comprehensive ------------- -------------- Paid-in Comprehensive Accumulated Stockholders'
Income Shares Amount Shares Amount Capital Income Deficit Equity
------------- ------ ------ ------ ------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 28, 1996.... 8,179 $ 82 -- $ -- $55,019 $ (25) $(16,932) $ 38,144
Net issuance of stock
under employee benefit
plans................. 432 3 (32) (341) 2,995 -- -- 2,657
Net income............. $ 1,395 -- -- -- -- -- -- 1,395 1,395
Net accumulated
translation losses.... (206) -- -- -- -- -- (206) -- (206)
-------- ----- ---- ---- ------- ------- ----- -------- --------
Total comprehensive
income............... $ 1,189
========
Balance at
September 27, 1997.... 8,611 85 (32) (341) 58,014 (231) (15,537) 41,990
Net issuance of stock
under employee benefit
plans................. 186 2 (17) (130) 761 -- -- 633
Acquisition of treasury
stock................. -- -- (387) (2,673) -- -- -- (2,673)
Net loss............... $(27,254) -- -- -- -- -- -- (27,254) (27,254)
Net accumulated
translation losses.... (83) -- -- -- -- -- (83) -- (83)
-------- ----- ---- ---- ------- ------- ----- -------- --------
Total comprehensive
income............... $(27,337)
========
Balance at October 3,
1998.................. 8,797 87 (436) (3,144) 58,775 (314) (42,791) 12,613
Net issuance of stock
under employee benefit
plans................. -- 1 170 1,015 (463) -- -- 553
Acquisition of treasury
stock................. -- -- (130) (407) -- -- -- (407)
Net loss............... $ 2,456 -- -- -- -- -- -- 2,456 2,456
Net accumulated
translation losses ... (184) -- -- -- -- -- (184) -- (184)
-------- ----- ---- ---- ------- ------- ----- -------- --------
Total comprehensive
income .............. $ 2,272
========
-------- --------
Balance at October 2,
1999.................. 8,797 $ 88 (396) $(2,536) $58,312 $(498) $(40,335) $ 15,031
===== ==== ==== ======= ======= ===== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents in thousands
(in thousands)
<TABLE>
<CAPTION>
Fiscal years ended
-------------------------------------
October 2, October 3, September 27,
1999 1998 1997
---------- ---------- -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)...................... $ 2,456 $ (27,254) $ 1,395
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 2,903 7,189 2,775
Translation adjustments.............. (184) (83) (206)
Special charges...................... -- 7,600 9,202
Gain (loss) on retirement of
equipment........................... -- -- 4
Deferred income taxes................ -- 4,577 735
Accrued rent......................... (92) (56) (25)
Changes in operating assets and
liabilities:
Accounts receivable.................... (4,516) 6,195 (3,035)
Inventories............................ 361 988 (1,290)
Prepaid expenses and other current
assets................................ 101 123 (122)
Other assets........................... (213) 176 (367)
Accounts payable....................... (1,026) 1,716 (1,702)
Accrued payroll and other expenses..... 855 (583) 31
Accrued commissions.................... 251 59 17
Income taxes payable................... (166) 113 (673)
Other accrued liabilities.............. (1,535) 249 254
Deferred revenues...................... (2,259) 2,473 168
------- --------- --------
Net cash provided by (used in)
operating activities.............. (3,064) 3,482 7,161
Investing activities:
Purchases of equipment and leasehold
improvements.......................... (2,230) (3,235) (2,192)
Purchase of Deerbrook Systems, Inc..... -- (500) --
Purchase of Interra, Inc. technology... -- (6,490) --
Purchase of Zycad technology........... -- -- (7,289)
Purchase of short-term investments..... (4,465) (14,047) (30,347)
Maturities of short-term investments... 9,112 21,859 29,656
------- --------- --------
Net cash provided by (used in)
investment activities............. 2,417 (2,413) (10,172)
Financing activities:
Principal payments on long-term
borrowings............................ -- (350) (750)
Net sale of common stock............... 553 633 2,657
Acquisition of treasury stock.......... (407) (2,673) --
------- --------- --------
Net cash provided by (used in)
financing activities.............. 146 (2,390) 1,907
------- --------- --------
Decrease in cash and cash equivalents.... (501) (1,321) (1,104)
Cash and cash equivalents at beginning of
period.................................. 8,165 9,486 10,590
------- --------- --------
Cash and cash equivalents at end of
period.................................. $ 7,664 $ 8,165 $ 9,486
======= ========= ========
Supplemental disclosures of cash flow
information:
Net cash paid for income taxes......... $ 817 $ 337 $ 311
Supplemental disclosure of noncash
financing activities:
Issuance of common stock under employee
benefit plans in exchange for common
stock................................. -- $ 130 $ 341
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1999
1. Nature of operations and summary of significant accounting policies
Nature of operations: The Company develops, manufactures, markets and
supports hardware and software systems for the verification of integrated
circuit designs. The Company's strategy is to serve the needs of a growing
universe of IC designers for fast, accurate verification of complex IC designs
through its family of hardware and software simulation and emulation systems.
The Company performs final assembly and test of all of its products in its
Cupertino, California facility and utilizes third parties for all major
subassembly manufacturing. Certain key components used in the Company's
products are presently available from sole or limited sources. The Company is
dependent upon these suppliers to provide these components on a timely basis.
The Company sells its products to a broad range of customers in the
communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries.
Basis of presentation: The accompanying consolidated financial statements
include the Company and its wholly owned subsidiaries after elimination of all
significant inter-company accounts and transactions.
Fiscal year: The Company is on a 52-53 week fiscal year. Accordingly,
October 2, 1999, October 3, 1998 and September 27, 1997 are the fiscal year-
ends for 1999, 1998 and 1997, respectively. Fiscal 1999 and 1997 were 52 week
fiscal years. Fiscal year 1998 was a 53 week fiscal year.
Cash equivalents and short-term investments: All liquid investments with
original maturities of three months or less when purchased are considered to be
cash equivalents and are stated at cost, which approximates their fair value.
At October 2, 1999, cash equivalents consisted of money market funds,
certificates of deposits and U.S. corporate overnight securities. Short-term
investments are stated at cost, which approximates market, and consist
primarily of mortgage-backed government obligations all due within one year.
The Company is exposed to credit risks in the event of default by the financial
institutions or issuers of investments to the extent of amounts recorded on the
balance sheet.
Under Statements of Financial Accounting Standards No. 115 (FAS 115),
"Accounting for Certain Investments in Debt and Equity Securities," debt
securities that the Company has both positive intent and ability to hold to
maturity are carried at amortized cost. Debt securities that the Company does
not have the positive intent and ability to hold to maturity and all marketable
equity securities are classified as available-for-sale or trading and carried
at fair value. Unrealized holding gains and losses on securities classified as
available-for-sale are reported as part of equity while unrealized holding
gains and losses on securities classified as trading are reported in earnings.
At October 2, 1999, all securities are designated as held to maturity.
The fair values for marketable debt securities are based on quoted market
prices. The fair value of marketable securities is substantially equal to their
carrying values as of October 2, 1999 and October 3, 1998.
F-6
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
The following is a summary of held-to-maturity securities at October 2, 1999
and October 3, 1998 (in thousands):
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
---------- ----------
<S> <C> <C>
U.S. Treasury Securities.............................. $ -- $ 982
U.S. Corporate Securities............................. -- 2,910
Mortgage-Backed Securities............................ 2,870 3,625
------- -------
$ 2,870 $ 7,517
======= =======
Amounts included in short-term investments............ $ 2,870 $ 7,517
======= =======
Amounts included in cash and cash equivalents......... $ -- $ --
======= =======
Inventories: Inventories are stated at the lower of cost (first-in, first-
out method) or market (estimated net realizable value). Inventories consist of
the following (in thousands):
<CAPTION>
October 2, October 3,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials......................................... $ 818 $ 1,520
Work-in-process....................................... 1,435 1,163
Finished goods........................................ 1,202 1,133
------- -------
$ 3,455 $ 3,816
======= =======
</TABLE>
Equipment and leasehold improvements: Equipment and leasehold improvements
are stated at cost and are depreciated or amortized using the straight-line
method over the estimated useful life (generally two to five years) of the
related asset, or in the case of leasehold improvements, the term of the lease,
if shorter.
Goodwill, software development costs and other long-lived assets: The
Company periodically reviews and evaluates its recorded goodwill and other
long-lived assets for impairment. During the fourth quarter of 1998, the
Company evaluated and concluded that based on the strategic changes and the
current form of the emulation technology, the original technology acquired from
Virtual Machine Works, Inc. (VMW) would no longer be used, and thus, the
unamortized intangibles associated with the original transaction were written
off. The Company recorded a charge to operations of approximately $3,200,000,
included in the $4,679,000 of the total amortization recognized in fiscal 1998.
There were no write-downs of intangible assets in fiscal 1999 or 1997.
The Company capitalizes software development costs upon achievement of
technological feasibility, subject to net realizable value considerations in
accordance with Statement of Financial Accounting Standards No. 86. The Company
has defined technological feasibility as completion of a working model. Such
capitalized costs are amortized upon product release on a straight-line basis
over the estimated useful life of two years or the ratio of current revenue to
the total of current and anticipated future revenues, whichever is greater. For
each of the three fiscal years ended October 2, 1999 capitalizable costs were
insignificant and thus charged to research and development expenses for the
respective periods in the accompanying financial statements.
Revenue recognition: Product revenues, which include licensing and software
revenues, are generally recognized on shipment, provided that no significant
vendor or post-contract support obligations remain outstanding and collection
of the resulting receivable is deemed probable. Revenue under maintenance
contracts is recognized ratably over the term of the related contract,
generally twelve months. Revenue recognized under consulting arrangements are
generally recognized upon the achievement of agreed upon milestones.
F-7
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
Warranty: The Company warrants products sold to customers for ninety days
from shipment. A provision for the estimated future cost of warranty is
recorded upon shipment.
Employee stock plans: The Company accounts for its stock option and employee
stock purchase plans in accordance with provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees."
The Company provides additional pro forma disclosures as required under
Statement of Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation."
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Such estimates related to the useful lives of fixed assets, allowances for
doubtful accounts and customer returns, inventory write-downs, other reserves
and income tax valuation allowances. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements.
Translation of foreign currencies: For foreign operations with the local
currency as the functional currency, the translation of the applicable foreign
currencies into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period. The gains or
losses resulting from translation are included in accumulated other
comprehensive income in the accompanying balance sheets. The Company also
recognizes foreign currency transaction gains and losses at its international
operations. Such gains or losses are charged to operations and have been
immaterial to the Company's operating results.
Derivative Financial Instruments: The Company enters into derivative
financial instruments such as forward exchange contracts to hedge certain
identifiable receivables denominated in Japanese yen against fluctuations in
exchange rates until such receivables are collected. The Company does not enter
into forward foreign contracts for speculative or trading purposes. The
Company's accounting policies for these contracts are based on the Company's
designation of the contracts as hedging transactions. The criteria the Company
uses for designating a contract as a hedge includes the contract's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. As such, the impact of exchange rate
changes on these contracts is offset by the impact of the changes in the rate
on the underlying transactions. Therefore, any market risks associated with
these contracts and related underlying transactions are deemed minimal. As of
October 2, 1999, the Company did not have any foreign forward contracts
outstanding.
Net income (loss) per share: The Company computes earnings per share in
accordance with the Financial Accounting Standards Board "(FASB) Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic earnings per
share is computed using weighted options outstanding for the period and
excluding the dilutive effect of stock options and warrants. Dilutive per share
data is computed using the
F-8
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
weighted-average common and dilutive common equivalent shares outstanding. All
earnings (loss) per share data for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements. The
following table sets forth the computation of basic and dilutive per share
data:
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------
October, 2 October 3, September 27,
1999 1998 1997
---------- ---------- -------------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Net Income (loss)......................... $2,456 $(27,254) $1,395
====== ======== ======
Weighted-average common shares
outstanding.............................. 8,306 8,418 8,408
====== ======== ======
Basic net income (loss) per share......... $ 0.30 $ (3.24) $ 0.17
====== ======== ======
Dilutive earnings (loss) per share:
Net Income (loss)......................... $2,456 $(27,254) $1,395
====== ======== ======
Weighted-average common shares
outstanding.............................. 8,306 8,418 8,408
Common equivalent shares attributable to
options (treasury stock method)......... 834 -- 519
------ -------- ------
Total weighted-average common shares
outstanding.............................. 9,140 8,418 8,927
====== ======== ======
Dilutive net income (loss) per share...... $ 0.27 $ (3.24) $ 0.16
====== ======== ======
</TABLE>
Outstanding options and warrants to purchase approximately 214,000 1,706,000
and 804,000 shares, for the fiscal years 1999, 1998 and 1997, respectively,
under the Company's Stock Option Plan were not included in the treasury stock
calculation to derive diluted income per share as their inclusion would have
had an anti-dilutive effect.
Impact of recently Issued Accounting Standards: In March 1998, the American
Institute of Certified Public Accounts issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed for Obtained for
Internal Use" ("SOP 98-1"), which provides guidelines for accounting for costs
of computer software developed for internal use. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
adoption of SO 98-1 is not expected to materially impact the Company's results
of operation or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is required to be adopted in years
beginning after June 15, 2000. The adoption of SFAS 133 is not expected to
materially impact the Company's results of operations or its financial
position.
2. Acquisitions
Virtual Machine Works, Inc.: In May 1996, the Company completed the
acquisition of VMW, a development stage company and a developer of logic
emulation systems. Under the terms of the acquisition, the Company paid
approximately $10,712,000 in cash and issued approximately 113,000 shares of
common stock to the former stockholders of VMW. The transaction was treated as
a purchase; accordingly the purchase price was allocated to the tangible assets
acquired, goodwill and liabilities assumed at their fair market values using a
risk adjusted discounted cash flows approach. During 1998, the Company
abandoned the original technology. As such, the Company recorded a charge to
operations to write-off the remaining unamortized
F-9
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
value of the intangible. Prior to the write-off, the Company recorded
amortization of $1,479,000 relating to capitalized intangible assets in fiscal
1998 and amortization of $1,260,000 in fiscal 1997, respectively.
Zycad Corporation: In April and August 1997, the Company completed the
purchase of certain software and hardware simulation technology from Zycad
Corporation for approximately $7,600,000 in cash. The technology acquisition
was charged to operations.
Interra, Inc.: In May 1998, the Company acquired certain technology and
research and development expertise from Interra, Inc. and its affiliate,
Delsoft India Pvt. Limited. The purchase price paid, including costs of the
transaction, was approximately $9,040,000. Through November 30, 1998, the
Company had paid approximately $7,340,000 with the remaining $1,700,000 to be
paid in two equal installments through November 1999. At October 2, 1999,
approximately $840,000 remain outstanding. The Company recorded a charge of
approximately $7,600,000 related to the acquired technology to in-process
research and development. The evaluation of the underlying technology acquired
considered the inherent difficulties and uncertainties in completing the
development of the technology, and thereby achieving technological feasibility,
and the risks related to the viability of and potential changes in future
target markets. The underlying technology had no alternative use (in other
research and development projects or otherwise) since the technology was
acquired for the sole purpose of developing simulation and emulation products.
In connection with the technology acquisition, the Company recorded as an asset
approximately $1,400,000 for the acquired workforce and other intangibles,
which are to be amortized over 8 years. As of October 2, 1999, approximately
$1,106,000 remains to be amortized.
3. Operating Leases
Non-cancelable operating leases include building leases, which expire in
September 2000. The Company has the option to renew its building lease at its
principal offices for up to an additional nine years, commencing in September
2000, at the fair market value at the time of renewal. The Company subleased
certain facilities through April of fiscal 1997. Sublease rental income was
approximately $67,000 in fiscal 1997.
Rent expense approximated $1,632,000, $1,633,000 and $1,153,000, in fiscal
1999 1998, 1997, respectively.
Future minimum payments under non cancelable operating leases at October 2,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
2000.................................................................. $1,098
2001.................................................................. 112
2002.................................................................. 21
------
Total............................................................. $1,231
======
</TABLE>
4. Comprehensive Income
The Company adopted the Statement of Financial Accounting Standards No. 130
(SFAS 130) "Reporting Comprehensive Income" in the first quarter of fiscal
1999. SFAS 130 established standards for the reporting and disclosure of
comprehensive income and its components; however, the disclosure has no impact
on the Company's consolidated results of operations, financial position or cash
flows. Comprehensive income is defined as the change in equity of a company
during a period resulting from certain transactions and other
F-10
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
events and circumstances, excluding transactions resulting from investments by
owners and distributions to owners. The difference between net income (loss)
and comprehensive income (loss) for the Company is from foreign currency
translation adjustments.
5. Stockholders' equity
Preferred Stock Purchase Rights Plan: The Company has a Preferred Stock
Purchase Rights Plan (the "Rights Plan") which provides existing shareholders
with the right to purchase 1/100 preferred share for each common share held in
the event of certain changes in the Company's ownership. The Rights Plan may
serve as a deterrent to takeover tactics, which are not in the best interests
of shareholders. The Board of Directors of the Company has designated 500,000
shares of Series G Preferred Stock, $0.01 par value per share, and has reserved
such shares for issuance pursuant to the Company's Rights Plan.
Stock Repurchase: During fiscal 1998, the Company announced its intention to
repurchase up to 1,000,000 shares of its outstanding common stock on the open
market. Through October 2, 1999, the Company had repurchased 516,500 shares at
a weighted-average per share price of $5.96 and approximately 170,000 shares of
this total have been reissued through the Company's stock option and stock
purchase plans.
VMW Acquisition: In connection with the acquisition of VMW, the Company
granted options to purchase approximately 84,000 shares of common stock in
exchange for VMW options. The option prices range from $0.85--$2.54 and are
included in the grants in the table below. In connection with the acquisition,
the Company also issued warrants to purchase 25,000 shares of common stock at
$23.50 per share in return for professional services rendered. These warrants,
which were valued at approximately $200,000, are included as consideration in
connection with the acquisition. These warrants expire on April 19, 2001.
At October 2, 1999, options to purchase approximately 13,300 shares of
common stock and warrants to purchase 25,000 shares of common stock remain
outstanding. The Company has reserved approximately 38,300 shares of common
stock for issuance in connection with these options and warrants.
Stock option plans: In 1988, the Company established a Stock Option Plan
(the Plan) which provides for the granting of options to employees or directors
to purchase shares of the Company's common stock. During fiscal 1996, the
Company replaced the 1988 Stock Option Plan by establishing the 1995 Stock
Option Plan (the "1995 Plan"). The terms of the 1995 Plan are similar to the
1988 Plan. Any shares remaining available for grant under the 1988 Plan were
converted to the 1995 Plan, and an additional 750,000 shares were reserved for
future grants under the 1995 Plan. In connection with its 1997 Annual
Shareholders meeting, the Company obtained approval whereby on the first day of
each fiscal year of the Company beginning after October 4, 1998, the maximum
aggregate number of shares of common stock issuable under the Company's 1995
plan will increase automatically 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. During 1997, 1998 and
1999 an additional 450,000, 430,000 and 410,000, shares were reserved for
future grants under the 1995 Plan, respectively.
In December 1997, the Board of Directors authorized the Company to offer all
employees the opportunity to cancel certain previously granted options in
exchange for new options with new vesting and expiration terms at the then fair
market value prices of $5.75 per share. In connection with this offer, options
to purchase 891,035 shares of common stock with a weighted-average price of
$15.68 were exchanged for new options.
In September 1998, the Board of Directors authorized the Company to offer
all employees the opportunity to cancel certain previously granted options in
exchange for new options with three year cliff vesting and a
F-11
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
three year expiration term at the then fair market value prices of $1.78 per
share. In connection with this offer, options to purchase 531,022 shares of
common stock with a weighted-average price of $6.93 were exchanged for new
options.
The following table summarizes the activity for the stock option plans (in
thousands, except per share data):
<TABLE>
<CAPTION>
Options and Rights Outstanding
(in thousands, except per share data)
--------------------------------------
Number Aggregate Price
of Shares Exercise Price Per Share
--------- -------------- -------------
<S> <C> <C> <C>
Balance at September 28, 1996........... 1,565 14,497 0.850-2.375
Granted............................... 658 12,912 12.500-25.125
Exercised............................. (339) (1,756) 0.850-19.125
Forfeitures........................... (400) (8,018) 0.850-28.375
------ -------
Balance at September 27, 1997........... 1,484 17,635 0.850-28.375
Granted............................... 2,232 10,329 1.438-12.688
Exercised............................. (88) (359) 0.850-6.000
Forfeitures........................... (1,707) (19,748) 0.850-28.375
------ -------
Balance at October 3, 1998.............. 1,921 7,857 0.850-28.375
Granted............................... 777 2,863 1.406-11.000
Exercised............................. (29) (59) 0.850-9.125
Forfeitures........................... (260) (1,111) 1.438-28.375
------ -------
Balance at October 2, 1999.............. 2,409 $ 9,550 $0.850-$25.00
====== =======
</TABLE>
The following table summarizes information about options outstanding at
October 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ----------------------------
Weighted-
Number Average Number
Range of Outstanding Remaining Weighted- Exercisable Weighted-
Exercise at October 2, Contractual Average at October 2, Average
Prices 1999 Life (Years) Exercise Price 1999 Exercise Price
-------- ------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$0.8500-
$1.7500 255,874 8.80 $1.71 10,952 $1.07
$1.7813-
$1.7813 468,272 8.94 1.78 -- --
$1.8125-
$3.5313 376,123 8.80 2.25 109,978 2.44
$3.6250-
$5.5000 573,239 7.58 4.38 273,262 4.15
$5.7500-
$5.7500 511,558 8.21 5.75 267,463 5.75
$6.0000-
$9.2500 203,329 8.27 7.97 80,136 8.43
$11.1250-
$25.0000 20,400 7.78 15.08 3,003 13.84
--------- ---- ------ ------- ------
$0.8500-
$25.0000 2,408,795 8.36 $ 3.94 744,794 $ 4.93
========= ==== ====== ======= ======
</TABLE>
Exercisable options were approximately 745,000, 489,000 and 593,000 at
fiscal year end for 1999, 1998 and 1997, respectively. At October 2, 1999,
there were no shares that were exercised and subject to repurchase.
Vesting provisions with respect to the Stock Option Plans are determined by
the Board of Directors at the date of grant. Generally, shares issued pursuant
to the Plan vest at 12 1/2% upon an employee's six-month employment date and
ratably thereafter in monthly installments over three and one-half years. At
October 2, 1999, options to purchase approximately 745,000 shares of common
stock were vested.
F-12
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
Included in the table above are options to purchase approximately 73,000
shares of common stock which were granted outside of the Plans during fiscal
1995. These options were granted to various employees and have rights and
vesting provisions which are the same as those granted pursuant to the plan. At
October 2, 1999, options to purchase approximately 13,000 shares of common
stock remain outstanding.
Total shares reserved for grant under option plans total 4,183,000
(excluding options subject to grant under the Outside Directors Stock Option
Plan), of which approximately 4,042,000 shares were granted, leaving
approximately 141,000 shares available for grant at October 2, 1999.
The Company has reserved 2,427,000 shares of common stock for future
issuance under the stock option plans for outstanding options and options
available for grant at October 2, 1999 and for future issuance of shares
granted outside of the option plan.
1995 Outside Directors Stock Plan: The Company's 1995 Directors Stock Option
Plan (the "Directors Plan") was adopted by the Company's Board of Directors in
June 1995 and approved in February 1996 which provided for the granting of
options to purchase up to 100,000 shares of common stock. During fiscal 1999,
an additional 100,000 shares were authorized to be granted to outside
directors. As of October 2, 1999, 128,000 shares had been granted to Directors,
no shares had been exercised and 18,000 shares had been canceled. As of October
2, 1999, options to purchase 110,000 shares are outstanding and are included in
the table presented above. A total of 200,000 shares of Common Stock have been
reserved for issuance under the Directors Plan.
1996 Stock Purchase Plan: In fiscal 1996, the 1996 Employee Stock Purchase
Plan (ESPP) was approved and 100,000 shares of common stock was reserved for
issuance under this plan. The ESPP provides that substantially all employees
may purchase stock at 85% of its fair value on certain specified dates via a
payroll deduction plan. During 1998 and 1999, the maximum aggregate number of
shares of common stock issuable under the Company's ESPP was increased by
150,000 and 400,000, respectively. Through October 2, 1999, approximately
322,000 shares have been issued under this plan. A summary of stock purchased
under the plan is shown below (in thousands, except employee participants).
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Aggregate purchase price............................ $470,000 $476,000 $961,000
Shares purchased.................................... 141,216 97,768 64,138
Employee participants............................... 123 132 146
</TABLE>
F-13
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
Stock Based Compensation: Pro forma information regarding net income (loss)
and net income (loss) per share is required by SFAS 123 for awards granted
after October 1, 1995 as if the Company had accounted for its stock-based
awards to employees under the fair value method of SFAS 123. The fair value of
the Company's stock-based awards to employees was estimated using a Black-
Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, the Black-Scholes
model requires the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------- -------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)................. 3.40 3.57 2.65 0.5 0.5 0.5
Expected stock price volatility....... 81.28% 70.98% 66.23% 88.62% 65.22% 68.19%
Risk-free interest rate............... 4.95% 5.47% 6.03% 4.95% 5.58% 5.82%
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock
based awards to employees is amortized over the options' vesting period (for
options) and the six month purchase period (for stock purchased under the
ESPP). The weighted-average fair value of stock options and employee stock
purchase rights granted during 1999 was $2.24 and $1.57 per share,
respectively. The weighted-average fair value of stock options and employee
stock purchase rights granted during 1998 was $2.31 and $3.93 per share,
respectively. The weighted-average fair value of stock options and employee
stock purchase rights granted during 1997 was $8.62 and $7.53 per share,
respectively.
The Company's pro forma information follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- -------
<S> <C> <C> <C>
Net income--as reported............................... $2,456 $(27,254) $ 1,395
Net income (loss)--pro forma.......................... 123 (30,242) (1,113)
Diluted net income per share--as reported............. 0.27 (3.24) 0.16
Diluted net income (loss) per share--pro forma........ 0.01 (3.59) (0.13)
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to October
1, 1995, its pro forma effect will not be fully reflected until approximately
2000.
6. Employee savings and investment plan
During fiscal 1996, the Company amended its 401(k) savings and investment
plan in which all employees, at least 21 years of age, are eligible to
participate. The amended plan allows for the Company to make matching
contributions based on an employee's elective deferrals. For fiscal 1999, the
matching contributions may not exceed $1,800 per employee. The matching
contributions were approximately $290,000 for fiscal 1999, $299,000 for fiscal
1998, and $304,000 for fiscal 1997.
F-14
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
7. Income taxes
The tax provision (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 2, October 3, September 27,
1999 1998 1997
---------- ---------- -------------
<S> <C> <C> <C>
Federal:
Current............................... $ 110 $ -- $ (283)
Deferred.............................. -- 3,584 740
----- ------ ------
110 3,584 457
State:
Current............................... 40 -- 35
Deferred.............................. -- 993 (5)
----- ------ ------
40 993 30
Foreign:
Current............................... 500 351 536
----- ------ ------
$ 650 $4,928 $1,023
===== ====== ======
</TABLE>
Pretax income (loss) from foreign operations was $360,000 in 1999,
($775,000) in 1998 and $1,330,000 in 1997.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate of 35% follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
October 2, October 3, September 27,
1999 1998 1997
---------- ---------- -------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S.
statutory rate.................... $ 1,090 $ (7,814) $ 846
Change in valuation allowance...... -- 10,923 --
Utilization of losses not
previously benefited.............. (756) -- --
Research and development credit.... -- -- (229)
Goodwill amortization.............. -- 1,468 442
Foreign taxes...................... 240 351 139
Foreign sales corporation benefit.. -- -- (181)
Other individually immaterial
items............................. 50 -- (13)
State taxes........................ 26 -- 19
------- -------- ------
$ 650 $ 4,928 $1,023
======= ======== ======
</TABLE>
As of October 2, 1999, the Company had federal and state net operating loss
carryforwards of approximately $6,300,000 and $2,500,000, respectively. The
Company also had federal and California research and development tax credit
carryforwards of approximately $2,050,000 and $1,064,000, respectively. The
Company also has federal alternative minimum tax credit carryforwards of
approximately $368,000. The federal net operating loss and research credit
carryforwards will expire at various dates beginning in 2001 through 2019, if
not utilized. The state net operating loss will expire in 2000, if not
utilized. The state research credit carryforwards and alternative minimum tax
credit carryforwards have no expiration date.
F-15
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation could result in the expiration of net operating losses and
credits before utilization.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 2,320 $ 3,964
Research credits and alternative minimum tax
credit.......................................... 3,130 2,711
Capitalized software............................. 450 250
Deferred revenue................................. 1,820 2,209
Purchased technology............................. 5,640 6,073
Accrued expenses and reserves.................... 3,936 3,698
-------- --------
Total deferred tax assets...................... 17,296 18,905
Valuation allowance for deferred tax assets.... (17,296) (18,905)
-------- --------
Net deferred tax assets............................ $ -- $ --
======== ========
</TABLE>
As of October 2, 1999, the Company had fully offset deferred tax assets by
a valuation allowance. Management believes that such net deferred tax assets
are not realizable on a more likely than not basis. The valuation allowance
decreased by $1,609,000 and increased by $13,279,000 for the years ended
October 2, 1999 and October 3, 1998, respectively. Approximately $4,500,000 of
the valuation allowance is attributable to stock options which will be
credited to equity when realized.
8. Segment information
The Company adopted the Financial Accounting Standards Board's Statement
No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information." The new standard revises the way operating segments are
reported. The Company operates and tracks its results in one operating
segment. The Company's operating segment is principally the development,
manufacture, sale and service of high performance hardware-assisted systems
for design verification of integrated circuits (ICs) and IC-based electronic
systems.
Enterprise wide information is provided in accordance with SFAS 131.
Geographic revenue information for the fiscal years 1999, 1998 and 1997 is
based on the shipping destination. Long-lived assets include primarily
property, plant and equipment as well as, intangible assets including
goodwill. Property, plant and equipment information is based on the physical
location of the asset at the end of each fiscal year while the intangibles are
based on the location of the owning entity.
F-16
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
Net revenues from unaffiliated customers by geographic region are as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
October 2, October 3, September 27,
1999 1998 1997
---------- ---------- -------------
<S> <C> <C> <C>
North America............................ $ 35,257 $ 26,361 $ 36,902
Far East................................. 8,258 4,912 6,228
Europe................................... 12,818 9,620 12,966
-------- -------- --------
$ 56,333 $ 40,893 $ 56,096
======== ======== ========
</TABLE>
Net long-lived assets by country are as follows (in thousands):
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
---------- ----------
<S> <C> <C>
United States.......................................... $ 5,052 $ 5,673
India.................................................. 563 378
France................................................. 110 95
United Kingdom......................................... 240 462
Germany................................................ 48 56
Japan.................................................. 155 217
------- -------
$ 6,208 $ 6,881
======= =======
</TABLE>
For fiscal years 1999, 1998 and 1997 one customer, Lucent Technologies,
accounted for approximately 14%, 13% and 11% of net revenues, respectively.
9. Concentration of credit risks and other risks
The Company sells its products to a broad range of customers in the
communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential credit losses and such losses
have been within management's expectations.
The electronic design automation (EDA) industry is characterized by rapid
technological changes, intense competitive pressures and cyclical market
patterns. The Company's results are affected by a wide variety of factors,
including general economic patterns, conditions specifically relating to
technology companies and the semiconductor and EDA industries. Also included
are decreases in average selling prices over the life of any particular
product, the timing of new product introductions (by the Company, its
competitors and others), the evolution of the electronic design community, the
ability to manufacture new products, and the ability to safeguard patents and
intellectual property from competitors. Based on the factors noted herein, the
Company may experience substantial period-to-period fluctuations in future
operating results.
F-17
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 2, 1999
10. Unaudited Quarterly Consolidated Financial Data
<TABLE>
<CAPTION>
Fiscal Quarters Ended
---------------------------------
Jan. 2, April 3, July 3, Oct. 2,
1999 1999 1999 1999
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net revenues................................ $11,344 $13,682 $15,012 $16,295
Gross profit................................ 8,529 10,263 11,274 12,489
Total operating expenses.................... 8,625 10,083 10,336 10,900
Income (loss) from operations............... (96) 180 938 1,589
Net income.................................. 52 258 784 1,362
Basic income per share (*).................. $ 0.01 $ 0.03 $ 0.09 $ 0.16
------- ------- ------- -------
Weighted-average shares used in computing
per share amounts.......................... 8,302 8,265 8,288 8,369
------- ------- ------- -------
Diluted income per share (*)................ $ .01 $ 0.03 $ 0.08 $ 0.14
======= ======= ======= =======
Weighted-average shares used in computing
per share amounts.......................... 8,644 8,974 9,406 9,533
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarters Ended
-----------------------------------
Jan. 3, April 4, July 4, Oct. 3,
1998 1998 1998 1998
------- -------- -------- --------
(**)
<S> <C> <C> <C> <C>
Net revenues......................... $12,065 $12,319 $ 8,424 $ 8,085
Gross profit......................... 9,052 9,146 3,531 4,430
Total operating expenses............. 8,620 8,793 18,574 13,529
Income (loss) from operations........ 432 353 (15,043) (9,099)
Net income (loss).................... 467 404 (14,583) (13,541)
Basic income (loss) per share........ $ 0.05 $ 0.05 $ (1.74) $ (1.62)
======= ======= ======== ========
Weighted-average shares used in
computing per share amounts......... 8,501 8,435 8,392 8,346
======= ======= ======== ========
Diluted income (loss) per share...... $ 0.05 $ 0.05 $ (1.74) $ (1.62)
======= ======= ======== ========
Weighted-average shares used in
computing per share amounts......... 8,713 8,695 8,392 8,346
======= ======= ======== ========
</TABLE>
- --------
(*) Quarterly per share amounts do not equal the annual per share total as a
result of rounding.
(**) Represents the 14 week quarter in the 53 week fiscal year.
F-18
<PAGE>
3920-10K-00
<PAGE>
SCHEDULE II
IKOS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Deductions End
of Period Expenses Write-offs of Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 27, 1997..... $ 271 $ 230 $ -- $ 501
===== ===== ===== =====
Year ended October 3, 1998........ $ 501 $ 300 $ -- $ 801
===== ===== ===== =====
Year ended October 2, 1999........ $ 801 $ 108 $ 108 $ 801
===== ===== ===== =====
</TABLE>
S-1
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
Name of Subsidiary:............ ICOS Systems GmbH
Jurisdiction of Germany
Organization:.................. ICOS Systems Computer Vertriebs GmbH
Name Under Which Doing
Business.......................
IKOS Systems, Ltd.
Name of Subsidiary:............ United Kingdom
Jurisdiction of IKOS Systems, Limited
Organization:..................
IKOS Systems K.K.
Name Under Which Doing
Business.......................
Takatsu-ku, Kawasaki-shi, Kanagawa
Name of Subsidiary:............ IKOS Systems Kabushiki Kaisha
Jurisdiction of IKOS (India) Pvt. Ltd.
Organization:.................. India
Name Under Which Doing
Business.......................
IKOS (India) Pvt. Ltd.
Name of Subsidiary:............
Jurisdiction of
Organization:..................
Name Under Which Doing
Business.......................
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 33-36208, 33-47891, 33-58872, 33-81994, 333-00877, 333-05077,
333-21833, 333-46455 and 333-71977) pertaining to the 1988 Stock Option Plan,
1995 Stock Option Plan, 1995 Outside Directors Stock Plan, 1996 Employee Stock
Purchase Plan, certain stock option agreements issued in connection with the
acquisition of Virtual Machine Works, Inc., and certain individual employee
stock option agreements of IKOS Systems, Inc. of our report dated October 21,
1999, with respect to the consolidated financial statements and schedule of
IKOS Systems, Inc., included in the Annual Report (Form 10-K) for the year
ended October 2, 1999.
Ernst & Young LLP
San Jose, California
December 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> OCT-02-1999
<CASH> 7,664
<SECURITIES> 2,870
<RECEIVABLES> 11,350
<ALLOWANCES> (801)
<INVENTORY> 3,455
<CURRENT-ASSETS> 24,973
<PP&E> 16,894
<DEPRECIATION> (11,832)
<TOTAL-ASSETS> 31,790
<CURRENT-LIABILITIES> 16,695
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 14,943
<TOTAL-LIABILITY-AND-EQUITY> 31,790
<SALES> 41,258
<TOTAL-REVENUES> 56,333
<CGS> 9,578
<TOTAL-COSTS> 13,778
<OTHER-EXPENSES> 39,944
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,106
<INCOME-TAX> 650
<INCOME-CONTINUING> 2,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,456
<EPS-BASIC> $0.27
<EPS-DILUTED> $0.30
</TABLE>
