<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 April 1, 2000 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 8,592,000,
--------------------------- ----------
(Title of Class) (Outstanding as of April 1, 2000)
================================================================================
<PAGE>
<TABLE>
<CAPTION>
IKOS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED April 1, 2000
INDEX
-----
Part I: Financial Information
Item 1: Financial Statements Page
<S> <C>
Consolidated Balance Sheets at April 1, 2000
and October 2, 1999........................................................... 3
Consolidated Statements of Income for the three and
six months ended April 1, 2000 and April 3, 1999.............................. 4
Consolidated Statements of Cash Flows for the six months
ended April 1, 2000 and April 3, 1999......................................... 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 4: Submission of Other Matters............................................. 15
Item 6: Exhibits and Reports on Form 8-K........................................ 15
Signatures......................................................................... 20
</TABLE>
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
--------- --------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................................... $ 11,832 $ 7,664
Short-term investments......................................................................... 3,516 2,870
Accounts receivable (net of allowances for
doubtful accounts of $801 and $801, respectively).......................................... 12,185 10,549
Inventories.................................................................................... 3,513 3,455
Prepaid expenses and other assets.............................................................. 165 435
-------- --------
Total current assets.................................................................... 31,211 24,973
Equipment and leasehold improvements
Office and evaluation equipment............................................................ 6,480 5,663
Machinery and equipment.................................................................... 11,155 10,513
Leasehold improvements..................................................................... 749 718
-------- --------
18,384 16,894
Less allowances for depreciation and amortization....................................... (13,351) (11,832)
-------- --------
5,033 5,062
Intangible assets (net of accumulated amortization of
$841 and $716, respectively)............................................................... 1,021 1,146
Other assets................................................................................... 275 609
-------- --------
$ 37,540 $ 31,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................... $ 4,740 $ 3,763
Accrued payroll and related expenses........................................................... 1,954 2,709
Accrued commissions............................................................................ 1,169 1,052
Income taxes payable........................................................................... 1,751 1,019
Other accrued liabilities...................................................................... 2,268 2,815
Deferred revenues.............................................................................. 7,157 5,337
-------- --------
Total current liabilities............................................................... 19,039 16,695
Accrued rent........................................................................................ -- 64
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 8,592 and 8,401 outstanding, respectively....................................... 88 88
Treasury stock, at cost, 205 shares in 2000 and
396 in 1999................................................................................ (1,322) (2,536)
Additional paid-in capital..................................................................... 57,991 58,312
Accumulated other comprehensive income......................................................... (658) (498)
Accumulated deficit............................................................................ (37,598) (40,335)
-------- --------
Total stockholders' equity.............................................................. 18,501 15,031
-------- --------
$ 37,540 $ 31,790
======== ========
</TABLE>
See notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
IKOS SYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
--------------------- ---------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues
Product.............................................. $12,403 $ 9,958 $23,452 $17,571
Maintenance.......................................... 4,396 3,724 8,752 7,455
------- ------- ------- -------
Total net revenues................................ 16,799 13,682 32,204 25,026
Cost of revenues
Product.............................................. 2,456 2,471 5,161 4,440
Maintenance.......................................... 1,215 948 2,238 1,794
------- ------- ------- -------
Total cost of revenues............................ 3,671 3,419 7,399 6,234
------- ------- ------- -------
Gross profit...................................... 13,128 10,263 24,805 18,792
Operating expenses:
Research and development............................. 3,953 3,433 7,207 6,448
Sales and marketing.................................. 5,760 5,536 11,681 10,140
General and administration........................... 1,288 1,011 2,341 1,914
Amortization of intangibles.......................... 42 103 125 206
------- ------- ------- -------
Total operating expenses.......................... 11,043 10,083 21,354 18,708
------- ------- ------- -------
Income from operations................................... 2,085 180 3,451 84
Interest income.......................................... 99 133 191 281
------- ------- ------- -------
Income before provision for income taxes................. 2,184 313 3,642 365
Provision for income taxes............................... 540 55 905 55
------- ------- ------- -------
Net income........................................ $ 1,644 $ 258 $ 2,737 $ 310
======= ======= ======= =======
Basic net income per share............................... $ 0.19 $ 0.03 $ 0.32 $ 0.04
======= ======= ======= =======
Common and common equivalent shares used
in computing per share amounts....................... 8,531 8,336 8,474 8,319
======= ======= ======= =======
Dilutive net income per share............................ $ 0.17 $ 0.03 $ 0.28 $ 0.04
Common and common equivalent shares used
in computing per share amounts....................... 9,926 9,046 9,723 8,845
======= ======= ======= =======
</TABLE>
See notes to financial statements.
4
<PAGE>
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents in thousands
<TABLE>
<CAPTION>
Six months ended
------------------------
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income.......................................................................... $ 2,737 $ 310
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization..................................................... 1,644 1,423
Accumulated translation adjustments .............................................. (160) (82)
Accrued rent...................................................................... (64) (45)
Changes in operating assets and liabilities:
Accounts receivable............................................................... (1,636) 438
Inventories....................................................................... (58) (1,185)
Prepaid expenses and other current assets......................................... 270 73
Other assets...................................................................... 334 152
Accounts payable.................................................................. 977 (790)
Accrued payroll and other expenses................................................ (755) 787
Accrued commissions............................................................... 117 536
Income taxes payable.............................................................. 732 (69)
Other accrued liabilities......................................................... (547) (1,547)
Deferred revenues................................................................. 1,820 198
-------- --------
Net cash provided by operating activities....................................... 5,411 199
Investing activities:
Purchases of equipment and leasehold improvements................................... (1,490) (1,201)
Purchase of short-term investments.................................................. (2,969) (3,919)
Maturities of short-term investments................................................ 2,323 6,563
-------- --------
Net cash provided by (used in) investment activities............................ (2,136) 1,443
Financing activities:
Net sale (repurchase) of common stock............................................... 893 (347)
-------- --------
Increase in cash and cash equivalents................................................... 4,168 1,295
Cash and cash equivalents at beginning of period........................................ 7,664 8,165
-------- --------
Cash and cash equivalents at end of period.............................................. $ 11,832 $ 9,460
======== ========
</TABLE>
See notes to financial statements.
5
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements at April 1,
2000 and for the three and six months ended April 1, 2000 and April 3,
1999, 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 2, 1999 included in the Form 10-K as filed with the
Securities and Exchange Commission on December 20, 1999. The unaudited
interim financial information reflects all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented. The results for the three and
six month periods ended April 1, 2000 are not necessarily indicative of
results expected for the full year.
Certain reclassifications, none of which affected net income, have been
made to prior year's amounts to conform to the current year's presentation.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of (in thousands):
April 1, October 2,
2000 1999
------ ------
Raw materials $ 705 $ 818
Work-in-process 1,216 1,435
Finished goods 1,592 1,202
------ ------
$3,513 $3,455
====== ======
3. Net Income Per Share
The computation of basic net income 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 per share. The incremental common shares
attributable to outstanding options for the three and six months ended
April 1, 2000 and April 3, 1999 included in the total shares used in the
denominator of the diluted net income per share calculation are as follows
(in thousands):
April 1, April 3,
2000 1999
-------- --------
Three months ended 1,395 710
===== ====
Six months ended 1,249 526
===== ====
6
<PAGE>
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Comprehensive Income
Comprehensive income for the three and six month periods ending April 1,
2000 and April 3, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- --------------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income as reported $1,644 $ 258 $2,737 $ 310
Accumulated translation
adjustments (82) (82) (160) 2
-------------- --------------
Comprehensive income $1,562 $ 176 $2,577 $ 312
============== ============== ============= ==============
</TABLE>
5. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes the SEC's views in applying generally
accepted accounting principles to selected revenue recognition issues. We
are required to apply the guidance in SAB 101 to our financial statements
no later than the first quarter of fiscal 2001. Changes in the Company's
revenue recognition policy resulting from the interpretation of SAB 101
would be reported as a change in accounting principle in the quarter ending
December 30, 2000. The change in the revenue recognition policy would
result in a cumulative adjustment in the first quarter of 2000 to reflect
the deferral of revenue for shipments previously reported as revenue, that
do not meet SAB 101 revenue recognition. The Company is currently
evaluating the impact of the new SAB.
6. Subsequent Events
Subsequent to April 1, 2000, the Company completed the establishment of a
line of credit with its bank. Under the terms of the agreement, the
Company will be able to utilize up to $3,000,000 for working capital
purposes and an additional $1,500,000 for capital acquisitions.
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 six month periods ending April 1, 2000 were
$16,799,000 and $32,204,000, respectively, representing a 23% and 29% increase
over the same periods of the prior year. The increase was a result of increases
in both product and maintenance revenues. For the three months ended April 1,
2000, product revenues increased as result of increases in both emulation and
simulation sales during the quarter. Emulation revenues increased approximately
17% over the prior year's quarter as the product continues to be accepted in the
marketplace. However, these results were slightly lower than the previous
quarter. The decline from quarter to quarter is believed to be a timing issue
and the Company expects continued growth of emulation revenues over the next two
quarters. For the six month period, emulation revenues grew by over 50% when
compared to the prior year six month period. The increase is a result of the
increased acceptance of the Company's current emulation offerings and the
ongoing upgrades to the product itself. Simulation revenues were 32% higher than
the prior year's quarter and 27% higher than the previous quarter. For the six
month period, simulation revenues increased 27% when compared to the same period
in fiscal 1999. The increase is directly related to the Company's newer
simulation products which continue to sell at a higher than expected level. The
Company anticipates that the ongoing revenue growth will be mainly from its
emulation products and the simulation revenues will show flat to lower results
as the transition to emulation continues.
For the three and six month period ended April 1, 2000, maintenance revenues
have increased due to the Company's current Voyager system installed base and
the Company's increasing emulation system installed base which has resulted in
an overall higher installed base of systems which are under maintenance
agreements. Maintenance revenues are expected to continue to grow, as they
relate to the emulation products. However, the overall growth of maintenance
revenues may be limited due to fewer customers renewing their maintenance for
the simulation products as this business evolves.
International sales for the quarter totaled $4,513,000 or approximately 27% of
total revenues. International revenues for the quarter were slightly lower when
compared to the prior year quarter. The decrease in revenues is primarily due
to timing of orders and shipments. For the six month period, international
revenues totaled $11,923,000 or 37% of total revenues and represents an increase
of 29% from the same period a year ago. The increases are due to higher sales
in the first quarter as a result of the timing of orders and shipments.
8
<PAGE>
Gross Profit Margins
Gross profit margins for the three and six month periods ended April 1, 2000
were 78% and 77%, respectively. Gross profit margins for the three and six
month periods ended April 3, 1999 were 75%. The increase in the product margins
is due to sales of higher margin products and the increased manufacturing
efficiencies. Product margins increased due to the volume while maintenance
margins decreased as a result of higher support costs related to newer products.
Research and Development Expenses
Research and development expenses for the three and six month periods ending
April 1, 2000 were approximately $3,953,000 and $7,207,000, respectively or 24%
and 22% of net revenues. This represented an increase of 15% over the second
quarter of 1999 and 12% for the six month period. Research and development
expenses increased primarily as a result of increased salaries, consulting costs
and prototype costs. The Company expects that research and development expenses
will continue to increase as the Company continues to upgrade its current
offerings and research new possibilities.
Sales and Marketing Expenses
Sales and marketing expenses for the three and six month periods ending April 1,
2000 were approximately $5,760,000 and $11,681,000, respectively or 34% and 36%
of net revenues. This represented an increase of 4% and 15% over the same three
and six month periods in fiscal 1999. The increase over the prior year quarter
and six month period is primarily related to increase salaries, commissions and
consulting expenses.
General and Administrative Expenses
General and administrative costs for the three and six month periods ending
April 1, 2000 were $1,288,000 and $2,341,000 or 8% and 7% of net revenues. For
the three and the six month periods, the general and administrative expenses
were comparable with the prior year in terms of percentage of revenues although
slightly higher in absolute dollars as a result of increased salaries and
related expenses. General and administrative costs are expected to remain flat
as a percentage of revenues over the remainder of fiscal 2000.
Income Taxes
The Company's effective tax rate on the consolidated pretax income for the three
and six month periods ended April 1, 2000 is 25%, as compared to an effective
tax rate of 18% and 15% for the three and six month periods of fiscal 1999. The
Company's 2000 effective tax rate for the three and six month periods ended
April 1, 2000 differs from the federal statutory rate primarily due to benefits
associated with its net operating loss carryforward. The Company's 1999
effective tax rate for the three and six month periods ended April 3, 1999
differs from the federal statutory rate primarily due to benefits associated
with its net operating loss carryforward.
9
<PAGE>
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 April 1, 2000, 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.
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.
Simulation revenues were approximately $10,894,000 for the first six months of
fiscal 2000. While the overall 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
10
<PAGE>
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's 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 continue its expected revenue growth, the Company
- -----------------------
needs to continue to invest in new product development. The Company continues to
focus most of its development resources on its emulation products. Since fiscal
1997, when the Company released its first generation emulator, the Company has
released two new generations of its emulation product. The Company has seen
favorable results with its latest release; however, there can be no assurance
that the product will continue to 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 for 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. However, performance problems or other difficulties that
may require design modifications and related expenses 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.
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
11
<PAGE>
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 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.
12
<PAGE>
Dependence Upon Certain Suppliers - Certain key components used in the Company's
- ---------------------------------
products are presently available from sole or limited sources. The inability to
develop alternative sources for these sole or limited source components or to
obtain sufficient quantities of these components could result in delays or
reductions in product shipments which could adversely affect the Company's
operating results. The Company's systems use proprietary 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.
Sales Support Personnel - Due the complex and technical environment, in which
- -----------------------
the Company operates, the Company's products require a significant level of pre-
sale support and in certain instance post-sale support. Due to the current
competitive environment for these support resources, the Company is faced with
many challenges in hiring, training and retaining the best application support
resources available. While the Company has been successful in the past in hiring
and training sales support personnel, there are no guarantees that the Company
can continue to hire and retain new employees as needed. Should the Company be
unable to attract and maintain an adequate level of application support
personnel, the Company's sales and support operations could be adversely
impacted. It is the Company's position to be competitive in the hiring,
training and retention of such personnel.
13
<PAGE>
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 increased to $15,348,000 at April 1, 2000 from $10,534,000 at
October 2, 1999. The increase was a result of $5,411,000 of cash provided by
operating activities, $1,490,000 of cash used in investing activities (excluding
short-term investment activities) and $893,000 of cash provided by financing
activities.
Operating Activities - The Company's operating activities provided cash of
- --------------------
$5,411,000 during the first six months of fiscal 2000. The $5,411,000 of cash
provided by operations was primarily due to net income adjusted for
depreciation, amortization, accumulated translation adjustments and deferred
rent, decreases in prepaid expenses and other assets, combined with increases in
accounts payable, deferred revenues, taxes payable and accrued commissions.
These increases in cash were offset by increases in accounts receivable and
inventories combined with decreases in accrued payroll and related expenses and
other accrued expenses.
Investing Activities - Net cash used in investing activities for the first six
- --------------------
months of 2000 was $2,136,000. The $2,136,000 of cash used was primarily the
result of $2,323,000 obtained from maturities of short-term investment offset by
purchases of short-term investments of $2,969,000 and acquisition of capital
equipment of $1,490,000.
Financing Activities - Net cash provided by financing activities for the six
- --------------------
months ended April 1, 2000, was $893,000 and was primarily related to the net
sales of stock under stock option and purchase plans during the six months.
The Company's primary unused sources of funds at April 1, 2000 consisted of
$11,832,000 of cash and cash equivalents, in addition to $3,516,000 of short-
term investments. In April 2000, the Company completed the signing of a new
credit facility that provides a $3,000,000 working capital line and a $1,500,000
capital equipment line. The Company believes that its current cash, cash
equivalents, short-term investments and its current credit facility, 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 assurance that such
financing will be available, if at all, on terms favorable or acceptable to the
Company.
14
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-3 Not applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on January 19, 2000.
The stockholders approved a proposal to elect the Board of Directors of the
Company to serve for the ensuing fiscal year. The proposal received the
following votes:
For Against
--------- -------
Gerald S. Casilli 7,331,295 31,486
Ramon A. Nunez 7,333,990 28,791
James R. Oyler 7,327,485 35,296
Glenn E. Penisten 7,331,650 31,131
William Stevens 7,332,690 36,241
Jackson Hu 7,326,640 36,141
In addition, stockholders ratified the appointment of Ernst & Young LLP as
independent public accountants of the Company for the fiscal year ending
September 30, 2000. The proposal received the following votes:
For Against Abstentions Broker Non-votes
--- ------- ----------- ----------------
7,359,579 1,900 1,302 0
ITEM 5 Not applicable
15
<PAGE>
ITEM 6 Exhibits and Reports on Form 8-K
(a) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<S> <C> <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).
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<S> <C> <C>
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).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<S> <C> <C>
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).
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exh. No. Documentation Description Page
- ------- ------------------------- ----
<S> <C> <C>
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 /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 1 of the Company's report of
Form 8-A as filed on January 29, 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).
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
NONE
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IKOS SYSTEMS, INC.
------------------
Registrant
Date: May 16, 2000 /s/ Joseph W. Rockom
---------------------
(JOSEPH W. ROCKOM CFO)
Principal Financial Officer,
Duly Authorized Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-2000
<PERIOD-START> JAN-02-2000 OCT-03-1999
<PERIOD-END> APR-01-2000 APR-01-2000
<CASH> 11,832 11,832
<SECURITIES> 3,516 3,516
<RECEIVABLES> 12,986 12,986
<ALLOWANCES> (801) (801)
<INVENTORY> 3,513 3,513
<CURRENT-ASSETS> 31,211 31,211
<PP&E> 18,384 18,384
<DEPRECIATION> (13,351) (13,351)
<TOTAL-ASSETS> 37,540 37,540
<CURRENT-LIABILITIES> 19,039 19,039
<BONDS> 0 0
0 0
0 0
<COMMON> 88 88
<OTHER-SE> 18,413 18,413
<TOTAL-LIABILITY-AND-EQUITY> 37,540 37,540
<SALES> 12,403 23,452
<TOTAL-REVENUES> 16,799 32,204
<CGS> 2,456 5,161
<TOTAL-COSTS> 3,671 7,399
<OTHER-EXPENSES> 11,043 21,354
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,184 3,642
<INCOME-TAX> 540 905
<INCOME-CONTINUING> 1,644 2,737
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,644 2,737
<EPS-BASIC> $0.19 $0.32
<EPS-DILUTED> $0.17 $0.28
</TABLE>
