<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended July 3, 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)
Delaware 77-0100318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19050 Pruneridge Ave., Cupertino, CA 95014
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:
(408) 255-4567
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.01 Par Value 8,295,000
---------------------------
(Title of Class) (Outstanding as of July 3, 1999)
================================================================================
<PAGE>
IKOS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JULY 3, 1999
INDEX
-----
Part I: Financial Information
Item 1: Financial Statements
Page
Consolidated Balance Sheets at
July 3, 1999 and October 3, 1998....................... 3
Consolidated Statements of Operations
for the three and nine month periods ended
July 3, 1999 and July 4, 1998.......................... 4
Consolidated Statements of Cash Flows
for the nine month periods ended
July 3, 1999 and July 4, 1998.......................... 5
Notes to Consolidated Financial Statements............... 6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations....... 8
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K.......................... 16
Signatures........................................................ 19
<PAGE>
Part I Financial Information
ITEM 1: Financial Statements
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
July 3, October 3,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 7,728 $ 8,165
Short-term investments.............................................. 3,824 7,517
Accounts receivable (net of allowances for
doubtful accounts of $801 and $801, respectively)............... 8,410 6,033
Inventories......................................................... 4,429 3,816
Prepaid expenses and other assets................................... 579 536
--------------- ---------------
Total current assets......................................... 24,970 26,067
Equipment and leasehold improvements:
Office and evaluation equipment................................. 5,246 4,876
Machinery and equipment......................................... 10,406 9,201
Leasehold improvements.......................................... 711 587
--------------- ---------------
16,363 14,664
Less allowances for depreciation and amortization............ (11,216) (9,342)
--------------- ---------------
5,147 5,322
Intangible assets (net of amortization of
$612 and $303, respectively).................................... 1,250 1,559
Other assets........................................................ 546 396
--------------- ---------------
$ 31,913 $ 33,344
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 4,744 $ 4,789
Accrued payroll and related expenses................................ 3,116 1,854
Accrued commissions................................................. 717 801
Income taxes payable................................................ 960 1,185
Other accrued liabilities........................................... 2,588 4,350
Deferred revenues................................................... 6,410 7,596
--------------- ---------------
Total current liabilities.................................... 18,535 20,575
Accrued rent............................................................ 89 156
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 8,295 and 8,361 outstanding, respectively............ 88 87
Additional paid-in capital.......................................... 58,744 58,775
Treasury stock, at cost, 502 shares in 1999 and
436 in 1998..................................................... (3,397) (3,144)
Accumulated other comprehensive loss................................ (449) (314)
Accumulated deficit................................................. (41,697) (42,791)
--------------- ---------------
Total stockholders' equity................................... 13,289 12,613
--------------- ---------------
$ 31,913 $ 33,344
=============== ===============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
IKOS SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues
Product...................................................... $11,098 $5,090 $28,669 $23,334
Maintenance.................................................. 3,914 3,334 11,369 9,474
------------ ---------- ---------- ---------
Total net revenues........................................ 15,012 8,424 40,038 32,808
Cost of revenues
Product...................................................... 2,681 4,473 7,121 9,651
Maintenance.................................................. 1,057 420 2,851 1,428
------------ ---------- ---------- ---------
Total cost of revenues.................................... 3,738 4,893 9,972 11,079
------------ ---------- ---------- ---------
Gross profit.............................................. 11,274 3,531 30,066 21,729
Operating expenses:
Research and development..................................... 3,411 4,485 9,859 10,533
Sales and marketing.......................................... 5,719 4,924 15,859 13,704
General and administration................................... 1,103 1,131 3,017 3,003
Acquired in-process research and
development and special charges -- 7,600 -- 7,600
Amortization of intangibles.................................. 103 434 309 1,147
------------ ---------- ---------- ---------
Total operating expenses.................................. 10,336 18,574 29,044 35,987
------------ ---------- ---------- ---------
Income (loss) from operations.................................... 938 (15,043) 1,022 (14,258)
Other income:
Interest income.............................................. 111 230 392 846
------------ ---------- ---------- ---------
Income (loss) before provision (benefit) for income taxes........ 1,049 (14,813) 1,414 (13,412)
Provision (benefit) for income taxes............................. 265 (230) 320 300
------------ ---------- ---------- ---------
Net income (loss)......................................... $784 ($14,583) $1,094 ($13,712)
============ ========== ========== =========
Basic net income (loss) per share................................ $0.09 ($1.74) $0.13 ($1.62)
============ ========== ========== =========
Weighted common shares used in
computing basic per share amounts............................ 8,288 8,392 8,285 8,443
============ ========== ========== =========
Dilutive net income (loss) per share............................. $0.08 ($1.74) $0.12 ($1.62)
============ ========== ========== =========
Common and common equivalent shares used
in computing per share amounts............................... 9,406 8,392 9,008 8,443
============ ========== ========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents in thousands
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
July 3, July 4,
1999 1998
--------------- ----------------
<S> <C> <C>
Operating activities:
Net income (loss)............................................................... $1,094 ($13,712)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization................................................. 2,048 3,123
Special charges............................................................... -- 7,600
Accrued rent.................................................................. (67) (40)
Changes in operating assets and liabilities:
Accounts receivable........................................................... (2,377) 2,590
Inventories................................................................... (613) 607
Prepaid expenses and other current assets..................................... (43) 160
Other assets.................................................................. (150) 193
Accounts payable.............................................................. (45) 850
Accrued payroll and other expenses............................................ 1,262 (98)
Accrued commissions........................................................... (84) (321)
Income taxes payable.......................................................... (225) 247
Other accrued liabilities..................................................... (1,762) (50)
Deferred revenues............................................................. (1,186) 977
--------------- ----------------
Net cash provided by (used in) operating activities......................... (2,148) 2,126
Investing activities:
Purchases of equipment and leasehold improvements............................... (1,699) (2,335)
Acquisiton of Deerbrook Systems, Inc............................................ -- (500)
Acquistion of Interra, Inc. technology.......................................... -- (6,490)
Purchase of short-term investments.............................................. (4,465) (11,623)
Maturities of short-term investments............................................ 8,158 17,632
--------------- ----------------
Net cash provided by (used in) investment activities........................ 1,994 (3,316)
Financing activities:
Principal payments on long-term borrowings...................................... -- (350)
Net repurchase of common stock.................................................. (283) (2,402)
--------------- ----------------
Net cash used in financing activities....................................... (283) (2,752)
--------------- ----------------
Decrease in cash and cash equivalents............................................... (437) (3,942)
Cash and cash equivalents at beginning of period.................................... 8,165 9,486
--------------- ----------------
Cash and cash equivalents at end of period.......................................... $7,728 $5,544
=============== ================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements at July 3,
1999 and for the three and nine month periods ended July 3, 1999 and July
4, 1998, have been prepared in conformity with generally accepted
accounting principles, consistent with those applied in, and should be read
in conjunction with, the audited consolidated financial statements for the
year ended October 3, 1998 included in the Form 10-K as filed with the
Securities and Exchange Commission on December 21, 1998. The unaudited
interim financial information reflects all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented. The results for the three and
nine month period ended July 3, 1999 are not necessarily indicative of
results expected for the full year.
2. Fiscal Year
The Company is on a 52-53 week fiscal year. Fiscal year 1998 was a 53-week
year and the three-month period ending January 3, 1998 included the
additional week for the fiscal year.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of (in thousands):
<TABLE>
<CAPTION>
July 3, October 3,
1999 1998
------------- -------------
<S> <C> <C>
Raw materials $1,195 $1,520
Work-in-process 1,225 1,163
Finished goods 2,009 1,133
------ ------
$4,429 $3,816
====== ======
</TABLE>
4. Net Income (Loss) Per Share
The computation of basic net income (loss) per share for the periods
presented is derived from the information on the face of the income
statement, and there are no reconciling items in either the numerator or
denominator. Additionally, there are no reconciling items in the numerator
used to compute dilutive net income (loss) per share. The total shares used
in the denominator of the diluted net income per share calculation includes
1,118,000 and 723,000 incremental common shares attributable to outstanding
options for the three and nine months ended July 3, 1999, respectively. For
the three and nine month periods in fiscal 1998, no shares were included in
the earnings per share calculation as such share would have been anti-
dilutive in those respective loss periods.
6
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Comprehensive Income
Comprehensive income (loss) for the three and nine month periods ending
July 3, 1999 and July 4, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) as reported $ 784 ($14,583) $1,094 ($13,712)
Accumulated translation
adjustments (137) (9) (135) (243)
----------- ----------- ------------- --------------
Comprehensive income (loss) $ 647 $ (14,592) $ 959 $ 13,955
=========== =========== ============= ==============
</TABLE>
6. Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
established standards for the way public enterprises report information in
annual statements and financial reports regarding operating segments,
products, services, geographic areas, and major customers. SFAS 131 will
be first reflected in the Company's 1999 Annual Report. The adoption of
SFAS 131 will not impact the Company's results of operations or financial
position.
In March 1998, the American Institute of Certified Public Accounts issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or 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 SOP 98-1 is not
expected to materially impact the Company's results of operations 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" ("SFAS133"), 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.
7
<PAGE>
ITEM 2. 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."
Net Revenues
Net revenues for the three and nine month periods ending July 3, 1999 totaled
$15,012,000 and $40,038,000, respectively, representing an increase of
approximately 78% and 22% from the same periods in fiscal 1998. The increases
were primarily a result of increases in sales of the Company's emulation
products. Emulation product revenue increased 488% from the prior year quarter.
The increase in revenues is a result of the Company's emulation product
offerings gaining acceptance in the marketplace during the three and nine months
ended July 3, 1999. For the nine-month period, emulation revenues were in
excess of $13,000,000 which represented an increase of over 100% over the
comparable period from the previous year. As indicated in the Company's Form
10-K filed in December of 1998, the Company encountered a lengthy beta period
with respect to its emulation offerings, which impacted the Company's
anticipated revenue growth in its emulation products during fiscal 1998. The
beta period was completed in the fourth quarter of fiscal 1998 and the Company
began ramping up shipments in the first quarter of fiscal 1999, which has
continued through the third fiscal quarter. The Company recently released its
next generation emulator and is expecting this new release to further enhance
its emulation sales. The Company's simulation revenues for the quarter
increased 47% when compared with the previous year's results and increased 29%
over the preceding quarter. While the Company has anticipated a slow down in its
sales of simulation products, due in part to increased focus on its emulation
business, as well as the overall market evolution, the Company has seen a
continual demand for its simulation products. The Company has released several
new simulation products and these new products are expected to keep the revenue
levels for the simulation business flat in the final quarter of the fiscal year.
Maintenance revenues for the three and nine month periods ending July 3, 1999
totaled $3,914,000 and $11,369,000, respectively, representing increases of 17%
and 20%, respectively, over the same periods from a year ago. The increases are
primarily attributable to the increasing emulation customer base and the
continued sale of maintenance for the current Voyager installed base. As the
Company transitions to more emulation focused customer base from its current
Voyager systems base, it is anticipated that maintenance revenues will remain
flat over the last quarter of the fiscal year.
International sales for the three and nine month periods ending July 3, 1999
totaled $4,370,000 and $13,643,000 respectively. These represented increases
over the same periods of fiscal 1998 of 83% and 21%. The Company has had higher
sales and bookings as economic demand has increased at its foreign locations
when compared to sales activity for the same periods of the previous year.
8
<PAGE>
Gross Profit Margins
Gross profit margin for the three and nine month periods ending July 3, 1999 was
75% and are higher when compared to the margins for the same periods in the
prior year. The Company's product margins were higher than the same quarter
from the previous year, while the margins on its maintenance products decreased.
The increases in product margins were primarily the result of increased sales of
the Company's higher margin products, inventory charges in the prior fiscal year
and lower overall revenues in the prior three and nine month periods. The
decreased margins for the maintenance is a result of increased costs associated
with new products, primarily emulation, offset by the larger maintenance
customer base.
Research and Development Expenses
Research and development expenses for the three and nine month periods ending
July 3, 1999 were approximately $3,411,000 and $9,859,000 or 23% and 25%,
respectively, of net revenues. Research and development for the three and nine
month periods ending July 4, 1998 were $4,485,000 and $10,533,000, or 53% and
32%, respectively of net revenues. The decrease in research and development
expenses are primarily due to certain non-recurring charges occurring in fiscal
1998 and certain start-up costs associated with the research and development
facility which opened in India in the third quarter of fiscal 1998. As a
percentage of net revenues, the decrease is also attributable to the
significantly lower revenues in fiscal 1998. The Company expects research and
development spending to increase in net absolute dollars as the Company
continues to address its on-going development efforts for new product technology
development.
Sales and Marketing Expenses
Sales and marketing expenses increased from $4,924,000, or 58% of net revenues
in the third quarter of fiscal 1998 to $5,719,000, or 38% of net revenues for
the third quarter of fiscal 1999. Sales and marketing expenses also increased
from $13,704,000 for the nine months ending July 4, 1998 to $15,859,000 for the
same period in fiscal 1999. The increases are a result of increased commissions
as certain salesmen exceed their quotas, increased rep commissions, focal
increases and other selling costs.
General and Administrative Expenses
General and administrative costs were $1,103,000 or 7% of net revenues and were
comparable in absolute dollars with the same quarter from fiscal 1998. General
and administrative costs for the first nine months of fiscal 1999 were
$3,017,000 and were comparable in absolute dollars with the first nine months of
fiscal 1998. General and administrative costs are expected to remain flat over
the remainder of fiscal 1999.
9
<PAGE>
Income Taxes
The Company's effective tax rate on the consolidated pretax income for the three
and nine month periods ended July 3, 1999 is 25% and 23%, respectively, as
compared to an effective tax rate of (2%) and 2% on the consolidated pretax loss
for the three and nine month periods ended July 4, 1998. The Company's 1999
effective tax rate for the three and nine month periods ended July 3, 1999
differs from the federal statutory rate primarily due to benefits associated
with its net operating loss carryforward. The tax benefit for the three month
period ended July 4, 1998, results from the overall loss reported for the
quarter and the fiscal year. The tax provision for the nine months ended July 4,
1998, results from taxes on income in jurisdictions despite an overall loss.
Other
The Company has experienced minimal gains or losses on foreign currency
translation since substantially all of its international sales to date have been
billed and collected in U.S. dollars. The Company pays the expenses of its
international operations in local currencies and to date the Company has not
engaged in hedging transactions with respect to such obligations. The Company
has reorganized its operations at its Japan subsidiary and is engaging in
transactions in the Japanese local currency. As such, the Company 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 underlying asset or
liability. Through July 3, 1999, the impact of 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.
10
<PAGE>
Increased Sales and Development of the Company's Products - Substantially all of
- ---------------------------------------------------------
the Company's product revenues since fiscal 1993 have been derived from the sale
of its Voyager and Gemini simulation systems. The Company has seen a decline in
such revenues and there can be no assurance the decline in these product's
revenues will reverse. Continued sales of the Company's hardware-assisted
simulation products for the verification of IC and system designs are expected
to depend on the introduction of new simulation products and methodologies.
Furthermore, sales will also depend on an increasing number of complex ICs
designed for electronic systems, integration of the Company's products with
other tools for IC design and simulation, the ability of hardware-assisted
simulation systems to shorten the time of simulation of IC designs and continued
industry acceptance of mixed-level hardware-assisted simulation at a reasonable
cost to the customer. Because the market for hardware-assisted simulation
products is evolving, it is difficult to predict with any assurance whether the
market for hardware-assisted simulation products will continue to expand. There
can be no assurances that such market will expand, or even if such market
expands that the Company's products will achieve the market acceptance required
to maintain revenue growth and profitability in the future.
Over the past year, the Company has increasingly focused a significant level of
its resources on its emulation product line. 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 has recently commercially released its second-generation
emulation product. 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, and as the Company continues to develop emulation
products which are based on the new technology concept, 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 emulation products will depend on a variety of factors, including but
not limited to, the timely and successful enhancement of current products,
completion of product design and development of future products, the timely and
efficient implementation of manufacturing processes, effective sales, marketing
and customer service, and the absence of performance problems or other
difficulties that may require design modifications and related expenses and may
hinder or damage market acceptance of the products. While the Company's
emulation systems are designed to provide cost and ease of use advantages
intended to broaden the market for logic emulation, there can be no assurance
that its products will be able to achieve such goals. Moreover, there can be no
assurance that the market for logic emulation will broaden beyond the current
set of emulation systems users. The adoption of any emulation products the
Company has or may develop will also depend on the continued increasing
complexity of ICs designed for electronic systems, integration of such products
with other tools for IC design and verification, importance of the time to
market benefits of emulation systems and industry acceptance of the need to
close the gap between high level design and silicon production. Because the
market for emulation products is new and evolving, it is difficult to predict
with any assurance whether the market for emulation products will continue to
expand, or even if such market expands, that the Company's products will achieve
the market acceptance required to maintain revenue growth and continued
profitability.
11
<PAGE>
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. While the Company expects that the technology
acquired and the resources obtained in this transaction will assist the Company
in meeting its new product introduction goals and deadlines, the Company has
significant development risk with respect to incorporating the acquired
technology into current products or generating new products from such
technology. Such effort will result in increased spending on research and
development as the Company attempts to meet these goals and deadlines. There
can be no assurances that such goals or deadlines will be achieved in a timely
manner. Furthermore, should such goals and deadlines for the introduction of
new products be attained, there can be no assurances that the resulting new
products will adequately meet the requirements of the marketplace.
Competition - The EDA industry is highly competitive and rapidly changing. The
- -----------
Company's products are specifically targeted at the emerging portion of the
industry relating to complex designs that the Company believes benefit from
simulation and emulation products. The Company currently 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 Cadence/Quickturn. The Company expects
competition in the market for verification tools to increase as other companies
attempt to introduce new products, such as cycle-based software simulation
products and product enhancements. Moreover, the Company competes, and expects
that it will continue to compete, with established EDA companies. A number of
these companies have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
larger installed customer bases than the Company. In addition, many of these
competitors and potential competitors have established relationships with
current and potential customers of the Company and offer a broader and more
comprehensive product line. Increased competition could result in price
reductions, reduced margins and loss of market share, all of which could
materially adversely affect the Company. In addition, current competitors or
other entities may develop other products that have significant advantages over
the Company's products. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its operating results.
New Products and Technological Change - The EDA industry is characterized by
- -------------------------------------
extremely rapid technological change in both hardware and software development,
frequent new product introductions, evolving industry standards and changing
customer requirements. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's future success will depend upon its
ability to enhance its current series of simulation and emulation systems and to
design, develop and support its future simulation and emulation products on a
timely basis. 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
12
<PAGE>
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 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 simulator and emulator 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
13
<PAGE>
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 1998, 1997 and 1996, sales to the Company's top ten customers
accounted for approximately 45%, 52% and 65%, respectively, of the Company's net
revenues. The Company expects that sales of its products to a limited number of
customers will continue to account for a high percentage of net revenues for the
foreseeable future. The loss of a major customer or any reduction in orders by
such customers, including reductions due to market or competitive conditions in
the electronics or EDA industries, would have an adverse effect on the Company's
results of operations. Moreover, the Company's ability to increase its sales
will depend in part upon its ability to obtain orders from new customers, as
well as the financial condition and success of its existing customers and the
general economy. There can be no assurance that such increases will occur.
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 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 is currently in the process
of performing its testing of such systems to confirm compliance. The Company
does not believe that the 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 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 is currently completing its contingency plans.
Accordingly, the Company will continue to devote the necessary resources to the
issue.
Euro Currency - Effective January 1999, 11 members of the countries of the
- -------------
European Union established a fixed conversion rate between their existing
sovereign currencies and the Euro and adopted the Euro as their common legal
currency. During a three-year transition, the Euro will be available for non-
cash transactions and legal currencies will remain the legal tender. The
Company is assessing the Euro impact on its business including the ability to
handle the conversion in the accounting system and other information systems,
ability of foreign banks to
14
<PAGE>
report on dual currencies, the legal and contractual implications of contracts,
and reviewing pricing strategies. The Company expects that modifications to its
operations and systems will be completed on a timely basis, and does not believe
the conversion will have a material adverse impact on the Company's operations.
However, there can be no assurance that the Company will be able to successfully
modify all systems and contracts to comply with Euro requirements on a timely
basis.
Liquidity and Capital Resources
Since inception, the Company has financed its operations, including increases in
accounts receivable, 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 $11,552,000 at July 3, 1999 from $15,682,000 at October
3, 1998. The decrease was a result of $2,148,000 of cash used in operating
activities, $1,699,000 of cash used in investing activities (excluding short-
term investment activities) and $283,000 of cash used in financing activities.
Operating Activities - The Company's operating activities used cash of
- --------------------
$2,148,000 during the first nine months of fiscal 1999. The $2,148,000 of cash
used in operations was primarily due to net income adjusted for depreciation,
amortization and deferred rent, increases in accounts receivable, inventory,
prepaid expenses and other assets combined with decreases in other accrued
liabilities, deferred revenues, taxes payable and accrued commission, offset by
an increase in accrued payroll and related expenses..
Investing Activities - Net cash provided by investing activities for the first
- --------------------
nine months of 1999 was $1,994,000. The $1,994,000 of cash provided was
primarily the result of $8,158,000 obtained from maturities of short-term
investment offset by purchases of short-term investments of $4,465,000 and
acquisition of capital equipment of $1,699,000. For each period presented,
capital expenditures were primarily for evaluation equipment and engineering
workstations.
Financing Activities - Net cash used in financing activities for the three
- --------------------
months ended July 3, 1999, was $283,000 and was primarily related to the net
purchases of stock during the nine months. 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. The Company did not repurchase any shares in
the third fiscal quarter but had acquired 130,000 shares of common stock for the
nine month period ending July 3, 1999. Through July 3, 1999, the Company had
repurchased approximately 516,500 shares at a weighted-average per share price
of $5.96.
The Company's primary unused sources of funds at July 3, 1999 consisted of
$7,728,000 of cash and cash equivalents, in addition to $3,824,000 of short-term
investments. 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. Should the Company require other financing arrangements, there
can be no assurances that such financing will be available on terms favorable or
acceptable to the Company.
15
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-5 Not applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) INDEX TO EXHIBITS
INDEX TO EXHIBITS
Exh. No. Documentation Description Page
- ------- ------------------------- ----
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).
16
<PAGE>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
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.
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).
17
<PAGE>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
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).
18
<PAGE>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
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).
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
filed on January 29, 1999).
10.24 Agreement dated April 11, 1997, by and between the
Company and Robert Hum.
10.25 Agreement dated February 2, 1999, by and between the
Company and Thomas N. Gardner.
10.26 Agreement dated February 3, 1999, by and between the
Company and Nader Fathi.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IKOS SYSTEMS, INC.
------------------
Registrant
Date: August 13, 1999 /s/ Joseph W. Rockom
-------------------------------
(JOSEPH W. ROCKOM CFO)
Principal Financial Officer,
Duly Authorized Officer
19
<PAGE>
Exhibit 10.24
[LETTERHEAD OF IKOS SYSTEMS, INC. APPEARS HERE]
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into the 11 day
of April, 1997 by and between IKOS Systems, Inc., a Delaware Corporation (the
"Company"), and Robert Hum ("Employee").
WITNESSETH
----------
WHEREAS, the Company desires to continue to obtain the benefit of the
services of Employee in connection with the conduct of its business and the
Employee is willing to continue to render such services subject to receipt of
the benefits described in this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties agree as follows:
1. Severance. If within one year of a Transfer of Control (as
---------
hereinafter defined) (a) Employee's employment with the Company is terminated
by the Company without cause (as hereinafter defined) or (b) Employee
terminates his employment with the Company within 60 days of (i) Employee
being required to move his office to a location more than thirty (30) miles
from the Company's principal place of business on the date immediately prior
to the Transfer of Control or (ii) Employee's base salary immediately prior to
the Transfer of Control being reduced, Employee shall continue to receive the
base salary (including commission, if any, based on the prior years average),
vacation and insurance and health benefits he received immediately prior to
the Date of Termination (as hereinafter defined) as if he were continually
employed by the Company for a period of three hundred sixty five (365) days
after the Date of Termination. Employee shall not be entitled to receive any
other compensation or benefits, including, without limitation, additional
stock options grants, bonus or other pay. Existing unvested stock options will
vest 100% as of the date of termination.
2. Definitions.
-----------
(a) Cause Defined. For the purposes hereof, termination
-------------
for cause will include but not be limited to, the following: (i) Employee's
violation of or failure to comply with any of the Company's successors
reasonable rules and regulations, (ii) Employee's failure or inability to
perform any reasonable assigned duties with a reasonable opportunity to cure
after written notice of such failure (unless such failure results from
employee's mental or physical disability), (iii) any act of dishonesty or
falsification of records by Employee relating to Employee's employment or (iv)
conviction of Employee for any felony or a crime involving fraud or
embezzlement.
(b) Date of Termination. For the purposes hereof, in the
-------------------
event the Company terminates the Employee's employment with the Company, the
Date of Termination shall be the earlier of (i) the date the Board of
Directors of the Company terminates Employee's employment or (ii) the date a
senior officer of the Company terminates Employee's
1
<PAGE>
employment. In the event Employee is required to relocate or Employee's base
salary is reduced, as described in paragraph 1 above, and as a result,
Employee elects to terminate his employment with the Company, the "Date of
Termination" shall be the date Employee notifies the Company that he is
terminating his employment.
(c) Ownership Change and Transfer of Control. For
----------------------------------------
purposes hereof, an "Ownership Change" shall be deemed to have occurred in the
event any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange by the
shareholders of the Company of all or substantially all of the stock of the
Company;
(ii) a merger or acquisition in which the Company is
a party; or
(iii) the sale, exchange, or transfer of all or
substantially all of the Company's assets (other than a sale, exchange, or
transfer to one (1) or more corporations where the shareholders of the Control
Company before such sale, exchange, or transfer retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the corporation(s) to which the assets were transferred).
A "Transfer of Control" shall mean an Ownership Change in which the
shareholders of the Company immediately before such Ownership Change do not
retain, directly or indirectly, at least a majority of the beneficial interest
in the voting stock of the Company. In the event of an Ownership Change or
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation, as the case may be (the "Acquiring Corporation"), shall assume
the Company's rights and obligations under this Agreement.
3. Nothing in this agreement shall affect the Employee's continuing
obligation under the EMPLOYMENT AGREEMENT between the Employee and the Company
regarding the handling of proprietary information and inventions.
4. Waiver or Modification. Any waiver, modification or amendment of
----------------------
any provision of this Agreement shall be effective only if in writing in a
document that specifically refers to this Agreement and such document is
signed by the parties against whom enforcement thereof is sought.
5. Entire Agreement. This Agreement constitutes the full and
----------------
complete understanding and agreement of the parties hereto with respect to the
subject matter covered herein and supersedes all prior oral or written
understandings and agreements with respect thereto.
6. Severability. If any provision of this Agreement is found to be
------------
unenforceable in any respect by a court of competent jurisdiction, such
unenforceability shall not affect the remaining provisions of this Agreement,
but this Agreement shall be construed as if such unenforceable provision had
been limited or modified (consistent with its general intent) to the
2
<PAGE>
extent necessary so that the provision shall be enforceable. If it is not
possible to so limit or modify such unenforceable provision, the Agreement
shall be construed as if such unenforceable provision had never been contained
herein and the parties will use their best efforts to substitute an
enforceable provision which implements the purposes and intents and provides
the same economic benefit to the parties as the unenforceable provision.
7. Notices. Any notice to be given by either party hereunder shall
-------
be in writing and shall be deemed to have been duly given if delivered or
mailed, certified or registered mail, postage prepaid, as follows to the
Company at: 19050 Pruneridge Avenue, Cupertino, California 95014, Attention:
Chief Executive Officer; and to the Employee at his address as it appears on
the payroll records of the Company; or to such other address as may be
furnished to the other party by written notice.
8. Arbitration. Any controversy between the Company and Employee
-----------
relating to this Agreement shall be settled by binding arbitration in Santa
Clara county pursuant to California Arbitration Act contained in Sections 1280
through 1294.2 of the California Code of Civil Procedure.
9. Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of California as such laws are applied
to agreements between California residents entered into and to be performed
entirely within California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
IKOS SYSTEMS, INC. EMPLOYEE: /s/ Robert Hum April 13, 1997
-------------------------------------
By: /s/ Ramon Nunez
----------------------------
Ramon Nunez
(Signature)
Title: President, CEO
--------------
3
<PAGE>
Exhibit 10.25
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into the 2/nd/
day of February, 1999, by and between IKOS Systems, Inc., a Delaware
Corporation (the "Company"), and Thomas N. Gardner ("Employee").
WITNESSETH
----------
WHEREAS, the Company desires to continue to obtain the benefit of the
services of Employee in connection with the conduct of its business and the
Employee is willing to continue to render such services subject to receipt of
the benefits described in this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties agree as follows:
1. Severance. If within one year of a Transfer of Control (as
---------
hereinafter defined) (a) Employee's employment with the Company is terminated
by the Company without cause (as hereinafter defined) or (b) Employee
terminates his employment with the Company within 60 days of (i) Employee
being required to move his office to a location more than thirty (30) miles
from the employee's principal place of business on the date immediately prior
to the Transfer of Control or (ii) Employee's base salary immediately prior to
the Transfer of Control being reduced, Employee shall continue to receive the
base salary (including commission, if any, based on the prior years average),
vacation and insurance and health benefits he received immediately prior to
the Date of Termination (as hereinafter defined) as if he were continually
employed by the Company for a period of three hundred sixty five (365) days
after the Date of Termination. Employee shall not be entitled to receive any
other compensation or benefits, including, without limitation, additional
stock options grants, bonus or other pay. Existing unvested stock options will
vest 100% as of the date of termination.
2. Definitions.
-----------
(a) Cause Defined. For the purposes hereof, termination
-------------
for cause will include but not be limited to, the following: (i) Employee's
violation of or failure to comply with any of the Company's successors
reasonable rules and regulations, (ii) Employee's failure or inability to
perform any reasonable assigned duties with a reasonable opportunity to cure
after written notice of such failure (unless such failure results from
employee's mental or physical disability), (iii) any act of dishonesty or
falsification of records by Employee relating to Employee's employment or (iv)
conviction of Employee for any felony or a crime involving fraud or
embezzlement.
(b) Date of Termination. For the purposes hereof, in the
-------------------
event the Company terminates Employee's employment with the Company, the Date
of Termination shall be the earlier of (i) the date the Board of Directors of
the Company terminates Employee's employment or (ii) the date a senior officer
of the Company terminates Employee's employment. In the event Employee is
required to relocate or Employee's base salary is reduced, as described in
paragraph 1 above, and as a result, Employee elects to terminate his
employment with the Company, the "Date of Termination" shall be the date
Employee notifies the Company that he is terminating his employment.
(c) Ownership Change and Transfer of Control. For
----------------------------------------
purposes hereof, an "Ownership Change" shall be deemed to have occurred in the
event any of the following occurs with respect to the Company:
1
<PAGE>
(i) the direct or indirect sale or exchange by the
shareholders of the Company of all or substantially all of the stock of the
Company;
(ii) a merger or acquisition in which the Company is a
party; or
(iii) the sale, exchange, or transfer of all or
substantially all of the Company's assets (other than a sale, exchange, or
transfer to one (1) or more corporations where the shareholders of the
Control Company before such sale, exchange, or transfer retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the corporation(s) to which the assets were transferred).
A. "Transfer of Control" shall mean an Ownership Change in which the
shareholders of the Company immediately before such Ownership Change do not
retain, directly or indirectly, at least a majority of the beneficial interest
in the voting stock of the Company. In the event of an Ownership Change or
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation, as the case may be (the "Acquiring Corporation"), shall assume the
Company's rights and obligations under this Agreement.
3. Nothing in this agreement shall affect the Employee's continuing
obligation under the EMPLOYMENT AGREEMENT between the Employee and the Company
regarding the handling of proprietary information and inventions.
4. Waiver or Modification. Any waiver, modification or amendment of
-----------------------
any provision of this Agreement shall be effective only if in writing in a
document that specifically refers to this Agreement and such document is
signed by the parties against whom enforcement thereof is sought.
5. Entire Agreement. This Agreement constitutes the full and complete
-----------------
understanding and agreement of the parties hereto with respect to the subject
matter covered herein and supersedes all prior oral or written understandings
and agreements with respect thereto.
6. Severability. If any provision of this Agreement is found to be
-------------
unenforceable in any respect by a court of competent jurisdiction, such
unenforceability shall not affect the remaining provisions of this Agreement,
but this Agreement shall be construed as if such unenforceable provision had
been limited or modified (consistent with its general intent) to the extent
necessary so that the provision shall be enforceable. If it is not possible to
so limit or modify such unenforceable provision, the Agreement shall be
construed as if such unenforceable provision had never been contained herein
and the parties will use their best efforts to the substitute an enforceable
provision which implements the purposes and intents and provides the same
economic benefit to the parties as the unenforceable provision.
7. Notices. Any notice to be given by either party hereunder shall
--------
be in writing and shall be deemed to have been duly given if delivered or
mailed, certified or registered mail, postage prepaid, as follows to the
Company at: 19050 Pruneridge Avenue, Cupertino, California 95014, Attention:
Chief Executive Officer, and to the Employee at his address as it appears on
the payroll records of the Company; or to such other address as may be
furnished to the other party by written notice.
8. Arbitration. Any controversy between the Company and Employee
------------
relating to this Agreement shall be settled by binding arbitration in Santa
Clara county pursuant to California Arbitration Act contained in Sections 1280
through 1294.2 California Code of Civil Procedure.
2
<PAGE>
9. Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of California as such laws are applied
to agreements between California residents entered into and to be performed
entirely within California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
IKOS SYSTEMS, INC. EMPLOYEE: /s/ Thomas N. Gardner
-----------------------
By: /s/ Ramon Nunez
-----------------
Ramon Nunez
(Signature)
Title: President, CEO
--------------
3
<PAGE>
EXHIBIT 10.26
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into the 3rd day of
February, 1999, by and between IKOS Systems, Inc., a Delaware Corporation (the
"Company"), and Nader Fathi ("Employee").
WHEREAS, the Company desires to continue to obtain the benefit of the
services of Employee in connection with the conduct of its business and the
Employee is willing to continue to render such services subject to receipt of
the benefits described in this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements hereinafter set forth, the parties agree as follows:
1. Severance. If within one year of a Transfer of Control (as hereinafter
---------
defined) (a) Employee's employment with the Company is terminated by the
Company without cause (as herinafter defined) or (b) Employee terminates his
employment with the Company within 60 days of (i) Employee being required to
move his office to a location more than thirty (30) miles from the Company's
principal place of business on the date immediately prior to the Transfer of
Control or (ii) Employee's base salary immediately prior to the Transfer of
Control being reduced, Employee shall continue to receive the base salary
(including commission, if any, based on the prior years average), vacation and
insurance and health benefits he received immediately prior to the Date of
Termination (as hereinafter defined) as if he were continually employed by the
Company for a period of three hundred sixty five (365) days after the Date of
Termination. Employee shall not be entitled to receive any other compensation
or benefits, including, without limitation, additional stock options grants,
bonus or other pay. Existing unvested stock options will vest 100% as of the
date of termination.
2. Definitions.
------------
(a) Cause Defined. For the purposes hereof, termination for cause will
-------------
include but not be limited to, the following: (1) Employee's violation of or
failure to comply with any of the Company's successors reasonable rules and
regulations, (ii) Employee's failure or inability to perform any reasonable
assigned duties with a reasonable opportunity to cure after written notice of
such failure (unless such failure results from employee's mental or physical
disability), (iii) any act of dishonesty or falsification of records by Employee
relating to Employee's employment or (iv) conviction of Employee for any felony
or a crime involving fraud or embezzlement.
(b) Date of Termination. For the purpose hereof, in the event the
-------------------
Company terminates Employee's employment with the Company, the Date of
Termination shall be the earlier of (i) the date the Board of Directors of the
Company terminates Employee's employment or (ii) the date a senior officer of
the Company terminates Employee's employment. In the event Employee is required
to relocate or Employee's base salary is reduced, as described in paragraph 1
above, and as a result, Employee elects to terminate his employment with the
Company, the "Date of Termination" shall be the date Employee notifies the
Company that he is terminating his employment.
(c) Ownership Change and Transfer of Control. For purposes hereof, as
----------------------------------------
"Ownership Change" shall be deemed to have occurred in the event any of the
following occurs with respect to the Company:
1
<PAGE>
(i) the direct or indirect sale or exchange by the shareholders of
the Company of all or substantially all of the stock of the Company;
(ii) a merger or acquisition in which the Company is a party; or
(iii) the sale, exchange, or transfer of all or substantially all of
the Company's assets (other than a sale, exchange, or transfer to one (1) or
more corporations where the shareholders of the Control Company before such
sale, exchange, or transfer retain, directly or indirectly, at least a
majority of the beneficial interest in the voting stock of the corporation(s)
to which the assets were transferred).
A. "Transfer of Control" shall mean an Ownership Change in which the
shareholders of the Company immediately before such Ownership Change do not
retain, directly or indirectly, at least a majority of the beneficial interest
in the voting stock of the Company. In the event of an Ownership Change or
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation, as the case may be (the "Acquiring Corporation"), shall assume the
Company's rights and obligations under this Agreement.
3. Nothing in this agreement shall affect the Employee's continuing
obligation under the EMPLOYMENT AGREEMENT between the Employee and the company
regarding the handling of proprietary information and inventions.
4. Waiver or Modification. Any waiver, modification or amendment of any
-----------------------
provision of this Agreement shall be effective only if in writing in a document
that specifically refers to this Agreement and such document is signed by the
parties against whom enforcement thereof is sought.
5. Entire Agreement. This Agreement constitutes the full and complete
-----------------
understanding and agreement of the parties hereto with respect to the subject
matter covered herein and supersedes all prior oral or written understandings
and agreements with respect thereto.
6. Severability. If any provision of this Agreement is found to be
-------------
unenforceable in any respect by a court of competent jurisdiction, such
unenforcebility shall not affect the remaining provisions of this Agreement,
but this Agreement shall be construed as if such unenforceable provision had
been limited or modified (consistent with its general intent) to the extent
necessary so that the provision shall be enforceable If it is not possible to
so limit or modify such unenforceable provision, the Agreement shall be
construed as if such unenforceable provision had never been contained herein
and the parties will use their best efforts to substitute an enforceable
provision which implements the purposes and intents and provides the same
economic benefit to the parties as the unenforceable provision.
7. Notices. Any notice to be given by either party hereunder shall be in
--------
writing and shall be deemed to have been duly given if delivered or mailed,
certified or registered mail, postage prepaid, as follows to the Company
at: 19050 Pruneridge Avenue, Cupertino, California 95014, Attention: Chief
Executive Officer, and to the Employee at his address as it appears on the
payroll records of the Company; or to such other addresses as may be furnished
to the party by written notice.
8. Arbitration. Any controversy between the Company and Employee relating
------------
to this Agreement shall be settled by binding arbitration in Santa Clara county
pursuant to California Arbitration Act contained in Sections 1280 through 1294.2
California Code of Civil Procedure.
2
<PAGE>
9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
IKOS SYSTEMS, INC. EMPLOYEE: /s/ Nadir Fathi 2/3/99
-------------------------
By: /s/ Ramon A. Nunez
----------------------
(Signature)
Title: President, CEO
----------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> OCT-02-1999 OCT-02-1999
<PERIOD-START> APR-04-1999 OCT-04-1998
<PERIOD-END> JUL-03-1999 JUL-03-1999
<CASH> 7,728 7,728
<SECURITIES> 3,824 3,824
<RECEIVABLES> 9,211 9,211
<ALLOWANCES> (801) (801)
<INVENTORY> 4,429 4,429
<CURRENT-ASSETS> 24,970 24,970
<PP&E> 16,363 16,363
<DEPRECIATION> (11,216) (11,216)
<TOTAL-ASSETS> 31,913 31,913
<CURRENT-LIABILITIES> 18,535 18,535
<BONDS> 0 0
0 0
0 0
<COMMON> 88 88
<OTHER-SE> 13,201 13,201
<TOTAL-LIABILITY-AND-EQUITY> 31,913 31,913
<SALES> 11,098 28,669
<TOTAL-REVENUES> 15,012 40,038
<CGS> 2,681 7,121
<TOTAL-COSTS> 3,378 9,972
<OTHER-EXPENSES> 10,336 29,044
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,049 1,414
<INCOME-TAX> 265 320
<INCOME-CONTINUING> 784 1,094
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 784 1,094
<EPS-BASIC> $0.09 $0.13
<EPS-DILUTED> $0.08 $0.12
</TABLE>
